LONDON -- The Swiss franc dropped sharply Tuesday after the country's central bank pegged it against the euro, while European stocks recovered their poise following a drubbing the previous session, when investors fretted over the exposure of banks to the debt of countries like Greece and Italy.
The most dramatic market movements centered on Switzerland after the central bank announced it was pegging the national currency at 1.20 francs per euro in an attempt to rein in the export-sapping appreciation of the currency.
The Swiss National Bank said it was ready to buy foreign currency in unlimited quantities to keep the franc weak.
The surprise announcement had immediate ramifications, particularly in the currency markets -- by early afternoon London time, the euro was 9 percent higher at 1.2037 francs.
The peg also helped Swiss stocks to outperform. Switzerland's main SMI index was up 4 percent at 5,347 as investors hoped the move would help Swiss businesses sell more in international markets. A weaker currency makes a country's goods and services more competitive all things being equal.
The franc has been hugely in demand in recent weeks due to its widely perceived status as a safe haven during times of market volatility. Gold, another safe haven, has also been hitting regular all-time highs.
Analysts were skeptical over whether the move will work in the long-run, especially if the European debt crisis causes the euro to fall.
"The SNB has in effect put itself in direct conflict with the markets' strong desire to buy safe haven assets," said Jane Foley, an analyst at Rabobank International. "In the very probable event that the eurozone crisis worsens in the coming months, intervention could be very costly for the SNB."
By early afternoon in Europe, the euro was up 0.5 percent at $1.4136 while the dollar was 8.4 percent higher at 0.8512 francs.
Meanwhile, European stocks pushed higher after big losses on Monday. Britain's FTSE 100 rose 1 percent to 5,153 while Germany's DAX rallied 0.5 percent to 5,270. The CAC-40 in France was 0.3 percent higher at 3,009.
"European indices bounced from their lows as bargain hunters made their moves to pick up stocks at what they perceive to be cheap valuations after yesterday's sharp bearish move," said Giles Watts, head of equities at City Index in London.
On Monday, investors in Europe were spooked by a combination of fears over the state of the global economy and Europe's debt crisis.
Wall Street, which was closed Monday for the Labor Day holiday, was expected to fall at the open despite the stabilization in Europe. Dow futures were down 1.8 percent at 11,008 while the broader Standard & Poor's 500 futures fell 2.1 percent at 1,145.
Analysts said stocks are likely to face a choppy few days as investors fret over the debts of Greece and Italy amid growing signs of political discord within the eurozone. Thursday's monthly interest rate decision from the European Central Bank and the subsequent press conference from its president Jean-Claude Trichet will also be closely monitored in relation to Europe's debt crisis.
Earlier in Asia, shares were under pressure following Monday's big falls in Europe.
Japan's Nikkei 225 index dropped 2.2 percent to close at 8,590.57 with shares of the country's powerhouse export sector skidding amid fears of another U.S. recession. Toshiba Corp. plunged 5.1 percent and Panasonic Corp. lost 3.4 percent.
Australia's S&P/ASX 200 shed 1.6 percent to 4,075.50 and South Korea's Kospi fell 1.1 percent at 1,766.71.
Mainland Chinese shares lost further ground with the Shanghai's benchmark Composite Index slipping to nearly a 14-month low, down 0.3 percent at 2,470.52. The Shenzhen Composite Index lost 1.1 percent to 1,085.35.
Bucking the trend, Hong Kong's Hang Seng registered a modest gain of 0.5 percent to 19,710.50.
In the oil markets, prices remained under pressure by concerns over global demand.
Benchmark oil for October delivery was down $1.91 to $84.54 in electronic trading on the New York Mercantile Exchange.