The Swiss franc has soared as much as 30% in chaotic trade after the central bank abandoned the cap on the currency's value against the euro.
The Swiss National Bank (SNB) said the cap, introduced in September 2011, was no longer justified.
At the same time it reduced a key interest rate from -0.25% to -0.75%, increasing the amount investors have to pay to hold Swiss deposits.
Following the SNB move the Swiss franc went from 1.20 to the euro to 0.8052.
It later recovered in mid-morning trade close to 1.05.
Swiss shares fell some 6% and stock markets around Europe fell with investors buying "safe haven" assets such as gold and German bonds.
Continue reading the main storyMany investors believe that with the franc so strong Swiss companies will struggle to win exports.
Watchmaker Swatch saw its share price slump 15%. Swatch chief executive Nick Hayek called the decision "a tsunami" for Switzerland's economy.
One trader described trading after the unexpected announcement as "carnage".
While the Swiss franc has been held at 1.20 to the euro it has tracked the euro's fall against the dollar.
ECB actionMany believe the euro will fall even further if the European Central Bank (ECB) starts quantitative easing, buying bonds to push cash into the eurozone banking system to stimulate a recovery.
Chris Beauchamp, market analyst at IG said: "My initial reaction was that it is a sign the ECB is about to do something, which makes it odd that the reaction has been so negative across European stocks.
"However, it's not every day that a central bank pulls the rug out from underneath something in such a massive way, and clearly people are worried that there's something bigger afoot."
Keeping the franc at 1.20 to the euro had became increasingly expensive for the SNB as it sold its own currency and bought up euros, sterling, US and Canadian dollars and yen, usually in the form of government bonds.
SNB foreign currency reserves have more than doubled since the cap was started in 2011 making it one of the five largest holders of foreign reserves in the world.
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