Switzerland's currency is 39 percent overvalued against the euro, based on purchasing power parity as calculated by the Organization for Economic Cooperation and Development. That's “a headache,” according to ABB Ltd., the world's largest maker of power-transmission gear, which responded by buying more parts from euro-region suppliers to feed its Swiss factories. Workers at Lonza Group AG, a Basel-based chemicals maker, are working longer hours without extra pay, while VonRoll Infratec AG, a maker of piping systems, is paying some salaries in euros.

'Drastic Decisions'
“If the franc can't be weakened, many machinery makers will have to take drastic decisions this fall,” Economiesuisse, the country's biggest business lobby group, said. The Swiss currency appreciated as much as 1.3 percent today, trading at 1.1181 at 1:48 p.m. in Zurich, up from 1.1329 yesterday. Versus the dollar, it was at 77.86 centimes.

The franc, considered a haven in times of turmoil, has appreciated 11 percent versus the euro this year, reaching a record 1.0075 on Aug. 9. Against the dollar, it appreciated to an all-time high of 70.71 centimes earlier this month. A visitor to a Swiss branch of McDonald's Corp. pays 128 percent more for a Big Mac than a U.S. diner, up from a 72 percent premium a year ago, according to a Bloomberg index that measures burger prices in dollars, based on data collected by “The Economist.”

Zurich is already the world's second-most expensive city after Oslo, a study conducted by UBS AG showed today. Zurich residents also had the highest wages and purchasing power, it said. Geneva ranked third in terms of prices.

'Generalized Fear'
The Swiss government and the central bank held “intense” talks over a possible franc target and measures are ready to be adopted this week, SonntagsZeitung reported on Aug. 14, citing people familiar with the situation. The SNB may introduce a lower limit of slightly above 1.10 against the euro before gradually increasing it, according to the newspaper.

“We have to find ways to further improve efficiency and hope that the franc will return to normal, which it will do eventually,” said Mehdi Barkhordar, managing director at Produits Artistiques Metaux Precieux, a Geneva-based precious metals refiner and trader known as PAMP. “Everyone in the world is panicked. It's the fashion today because of the climate of generalized fear.”

Daniel Kalt, an economist at UBS in Zurich, sees an exchange-rate target versus the euro along with purchases of foreign currencies as a way to stop investors from piling into the franc. The Zurich-based central bank was last forced to commit itself to an exchange-rate target in 1978, when it strapped its exchange rate to Germany's deutsche mark.

October Elections
Lawmakers, facing general elections in October, have joined executives in signaling increasing concern about the franc's ascent. Swatch Group AG Chief Executive Officer Nick Hayek and Credit Suisse Group AG Chairman Urs Rohner attended a meeting with Swiss Economy Minister Johann Schneider-Ammann on Aug. 2 in Bern, according to Neue Zuercher Zeitung. The participants all pledged to back the SNB, the report said.

Schneider-Ammann said after the meetings that the central bank “wants to feel that it's being supported on significant decisions.” The franc's strength will be on the agenda when the seven government members meet on Aug. 17.

“Corrections will only be sustainable if the SNB swiftly follows rumors with actions, or else it will be regarded as toothless tiger,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt.

Pride in Franc
With exports contributing about half of gross domestic product, Swiss companies including Nestle SA, the world's biggest food company, and UBS, the country's biggest bank, are under increasing pressure to cut costs to maintain margins.

Goldman Sachs Group Inc. earlier this month cut its Swiss growth forecasts for this year to 1.9 percent from 2.1 percent, and for next year to 0.6 percent from 2 percent. The “chances of the real economy emerging unscathed are remote,” economists Dirk Schumacher and Adrian Paul said.

“I'm proud of the Swiss franc, but something needs to be done,” said Peter Seid, 70, a retired teacher from Winterthur, Switzerland. “Otherwise, people will face pay cuts, or if the situation persists, they might even start losing their jobs.”

The SNB has been reluctant to purchase foreign currencies after attempts to weaken the franc in the 15 months through mid- June 2010 caused a record loss last year. Social Democratic lawmaker Susanne Leutenegger Oberholzer said as recently as last month if Hildebrand “isn't in the position to get the exchange rate under control,” he should step down.

Right Timing?
While it has shed about 3.5 percent against the euro since the SNB's surprise rate cut on Aug. 3, the franc has strengthened 7.2 percent over the past two months as European leaders struggled to contain the debt crisis. That will make it hard for the SNB to prevail, said to Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf.

“As long as people are concerned, the franc will continue to appreciate, probably beyond parity” with the euro, he said. “Currency interventions wouldn't be enough to counter this extreme risk aversion. The SNB is rather powerless.”

Policy makers are ready to “act as soon as we're convinced that it's the right time,” Jordan at the SNB told Tages- Anzeiger in an interview published on Aug. 11. He also said that “any temporary measures” to weaken the franc are possible, when asked about a currency peg to the euro.

Ashraf Laidi, CEO of Intermarket Strategy Ltd. in London, sees a currency peg as “far from practical,” while Simon Smith, chief economist at FXPro Financial Services Ltd. in London, said a currency target would be hard to impose while the franc remains strong.

No Panacea
“If the franc is as overvalued as the Swiss authorities currently believe, then this would have to be rectified somehow before a peg could be instigated,” Smith said. “The final issue is that, with sovereign risk factors being such a powerful force on currencies, it's quite difficult to see how the Swiss could stand side-by-side with the euro in the coming years.”

With all four main government coalition parties now willing to support renewed currency purchases, the SNB may find it easier to accelerate its efforts, said Adrian Vatter, a professor of political science at the University of Bern.

“Swiss parties are eventually uniting behind the government and the central bank,” Vatter said. “This will strengthen the SNB's credibility and give it the backing needed for setting an exchange-rate target.”

Swiss Battle
Swiss soldiers were last engaged in battle on Swiss soil in 1798/99 to fight the advancing army of Napoleon Bonaparte. The Swiss defeat led to the collapse of the old Swiss Federation.

Christophe Darbellay, head of the Christian Democratic Party, told Bloomberg News in a telephone interview that “we need to do everything we can to fight the franc's ascent given this difficult situation,” saying there is no “taboo.”

The central bank may have to spend between 200 billion ($251 billion) and 300 billion francs to defend any target, said Kalt at UBS. “The SNB would have to keep intervening and defending its lower target for as long as it takes,” and “it would be a high-risk game.”

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