By Haig Simonian in Vienna and Neil Dennis in London

The Swiss National Bank took the extraordinary steps on Tuesday of setting a minimum rate for the franc against the euro and pledging to buy unlimited quantities of foreign exchange if necessary, its latest bid to contain the country?s surging currency.

The central bank said it would set a minimum exchange rate of SFr1.20 against the euro after previous measures to weaken the franc proved ineffective amid the worsening eurozone crisis and a flight by investors to safe havens.

The surprise move prompted the franc to fall 9.5 per cent against the euro to SFr1.2158 and 7.8 per cent against the dollar to SFr0.8480. But analysts feared it could trigger a currency war.

?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 SNB said in a statement. ?The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc.?

It went on to say it would be prepared to buy foreign currency in ?unlimited quantities?.

The commitment will potentially expose the SNB to further massive losses. The central bank, which is part-privately owned, lost almost SFr20bn last year after fruitless interventions in the foreign exchange markets in 2010 left it holding massive quantities of euros and dollars, whose value steadily declined in Swiss franc terms.

Although the SNB abandoned its intervention strategy in July 2010,

the bank suffered further losses of about SFr10bn in the first half of this year as its foreign currency holdings further declined in value against

the surging franc.

The SNB added that ?even at a rate of SFr1.20 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.?

A minimum level against the euro had been demanded by Swiss exporters, many of which are believed to be suffering losses as they try to maintain business by slashing margins. The policy has also been advocated by some politicians and economists, although others have warned about the massive risks of trying to fight the markets and the potential dangers to the SNB.

The Swiss franc, which rose to almost parity against the euro at the beginning of August, fell to almost SFr1.20 after the SNB pumped liquidity into the system later in the month, turning some short-term interest rates negative and raising the costs of holding Swiss francs.

The steep loss of confidence in the eurozone in the last week had prompted a renewed surge in the Swiss currency, undoing most of the SNB?s previous emergency measures.

However, analysts said the SNB?s intervention could prompt retaliatory action from other central banks. ?The announcement now raises the potential risk that other central banks will also make surprise announcements to deal with this new round of risk aversion,? said Divyang Shah at IFR Markets.

Separately, one of Switzerland?s leading economic forecasters warned on Tuesday the economy was on the brink of a recession because of the strong currency and weakening world economy.

BAK Basel cut its forecast for Swiss economic growth next year to just 0.8 per cent, less than half the 1.9 per cent estimated for this year.

? The Financial Times Limited 2011