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Will Swiss succeed with new offensive in currency war?

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Swiss central bank moves on franc For those like me who are returning today from an end-of-summer break, the headlines are - not that surprisingly, I guess - strikingly similar to where we left off. Markets are anxious, economic fears continue to weigh, Greece is still in trouble, gold is still high, and the Swiss are still trying to fight a strong franc, with tough measures today.

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Currency markets, in particular, are in turmoil after the Swiss National Bank moved to curb the rise of its currency by setting a cap against the euro. The decision to "no longer tolerate" the euro trading at less than 1.20 francs knocked down the currency, known in markets as the CHF, whose strength has whacked the Swiss economy.

"The massive strength in the CHF over the past few months related to its safe-haven status has caused a huge drag on the Swiss economy," said Benjamin Reitzes of BMO Nesbitt Burns. "This policy manoeuvre should provide a lift; though offsetting the drag of the slowdown in the rest of the world is another story."

The SNB's announcement was aggressive, to say the least, warning of further action if its latest move fails to ease the pressure.

"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," the central bank said in a statement as it set the minimum exchange rate for the currency.

"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities," the central bank added. "Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures."

The Swiss franc is deemed to be one of the world's safest havens and, like other currencies such as the yen, has been on a tear. The central bank's move today raises questions about where anxious money goes now, and, in particular, what it could mean for the Japanese currency as it launches a new offensive in a currency war.

There's also the question of the success of such move.

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"Currency pegs have never worked in the long term and if it's such a silver bullet why haven't the Japanese tried it given they have been trying for years without too much success to weaken their currency?" said CMC Markets analyst Michael Hewson.

"For it to work the fundamentals in Europe need to change for the better and with such a fragmented and disorganized response to the current sovereign debt crisis expect the Swiss National Bank to have its work cut out defending the peg."

Euro troubles escalate The divisions in Europe are widening.

As BMO Nesbitt Burns notes today, markets are growing increasingly concerned that Greeks and Italians are fed up with austerity, while Germans are balking at financing the bailouts of the euro zone's weaker members.

The European Union and International Monetary Fund have warned Athens it must take further austerity measures because - no surprise here - its deficit is bigger than expected. In Italy, where the government is debating the austerity plan, there's a major strike under way. And in Germany on the weekend, Chancellor Angela Merkel's party lost another regional election.

"There are rising concerns that Greece and Italy are losing their appetite for fiscal austerity, and that Germany is losing its appetite for further bailouts," said BMO senior economist Sal Guatieri.

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Where Germany is concerned, Mr. Guatieri noted fears of opposition as "bailout fatigue" grows.

"This could force Merkel to take a harder line on providing further aid unless the peripheral countries show greater resolve to cut deficits and reform their economies," he said.

Precision Drilling in tax deal Precision Drilling Corp. has reached a deal with the taxman that will markedly lower what it has to pay.

Last year, the Canada Revenue Agency reassesed the Calgary-based company to the tune of $216-million, in both tax and interest, for its 2005 tax year. Precision disputed the move, but had to pay $108-million nonetheless while it appealed.

Under the deal announced today, the company said it now expects a reassessment of $37-million in tax and interest, which means a refund of $71-million. That will also mean a reassessment from Alberta of $13-million.

The two reassessments will mean a $50-million hit to the third-quarter results of Canada's biggest well drilling concern.

"We believe the settlement, which eliminates a potentially significant tax liability, is in the best long-term interests of Precision and its shareholders," said chief financial officer Rob McNally. " We are pleased to have resolution to this matter and close the final chapter of a 2005 transaction."

RIM shareholder calls for change I'm not suggesting that investors pay too much attention to an activist shareholder of Research In Motion Ltd. that doesn't disclose how much stock it holds, but it is a sign of growing unease surrounding the BlackBerry maker.

Jaguar Financial Corp. said in a statement today it wants RIM to launch a formal process for "maximization of shareholder value." That could mean a sale of the company or spinning out RIM's patent portfolio.

"The status quo is not acceptable, the company cannot sit still," said Jaguar chief Vic Alboini, noting the company's weak share price.

Still, Jaguar didn't say how much stock it owns, and it doesn't appear to be a major shareholder.

In Economy Lab Calls for a renewed infrastructure stimulus program in Canada are clearly premature, Stephen Gordon writes.

In International Business Diamonds are a girl's best friend, but the big question is whether they can also be the same for investors. Emiko Terazono of The Financial Times reports.

In Globe Careers How can you self-promote more comfortably, with grace and confidence? Kristi Hedges of Forbes looks at the issue.

In Personal Finance Parents who don't budget for Pizza Days, class parties, book fairs and field trips will feel the pinch.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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