Tags: Swiss | Franc | Euro | Debut

Swiss Franc Drops Most Since Euro Debut as SNB Says Peg Possible

Thursday, 11 Aug 2011 03:33 PM

The franc tumbled the most against the euro since the shared currency’s 1999 debut after Swiss National Bank Vice President Thomas Jordan said a temporary peg to the euro would be legal as policy makers try to stem the franc’s gains.

The Swiss currency fell versus all of its most-traded peers after rising to records versus the euro and dollar this week as Europe’s debt crisis and U.S. economic weakness spurred refuge demand. New Zealand’s dollar gained against the greenback as stocks climbed. The yen approached a post-World War II high versus the dollar, spurring speculation Japan may intervene.

“The Swiss announcement effect is certainly negative, and it pushed out some speculators at the margin,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank. “It has been very difficult for the Swiss National Bank to take the tide on safe haven buying. I fully expect to see further Swiss appreciation next week.”

The franc dropped as much as 6 percent to 1.0921 per euro before trading at 1.0840 at 1:55 p.m. in New York, down 5.2 percent. The Swiss currency weakened 4.7 percent to 76.26 centimes versus the dollar, from 72.66 yesterday.

The dollar lost 0.2 percent to $1.4207 versus the euro, from $1.4178 yesterday. The U.S. currency was little changed at 76.89 yen, compared with 76.87, after earlier touching 76.31. It reached a postwar low of 76.25 yen on March 17.

Stocks Climb

The dollar erased earlier gains against the euro as the Standard & Poor’s 500 Index rose 3.4 percent after falling 4.4 percent yesterday. Initial claims for jobless benefits in the U.S. unexpectedly fell last week to a four-month low of 395,000, data showed.

The premium European banks pay to borrow in dollars through the swaps market increased for a fourth-straight day, a sign of concern that officials in the region are struggling to contain the fiscal crisis.

The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 49.1 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback. It widened to as much as 50.8 basis points, the most since Dec. 17, according to data compiled by Bloomberg. Basis swaps allow investors to borrow in one currency and simultaneously lend in another.

Risk Appetite

Higher-yielding currencies such as New Zealand’s dollar and Sweden’s krona gained the most against the dollar amid higher appetite for risk. Benchmark interest rates are 2.5 percent in New Zealand and 2 percent in Sweden, while the key U.S. rate is zero to 0.25 percent.

New Zealand’s dollar added 1.5 percent to 82.34 U.S. cents and the Swedish krona rose 1.4 percent to 6.4904 per dollar.

A temporary Swiss franc peg with the euro is within the range of options that policy makers may use to stem the currency’s record-breaking rally, the SNB’s Jordan said in an interview with the newspaper Tages-Anzeiger today.

“Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” Jordan said.

A peg to the euro would require constant SNB efforts to defend the trading range as investors continue to flock to the currency’s perceived safety, said George Magnus, a senior economic adviser to UBS AG. It “actually gives them obligations to intervene,” he said in an interview in London.

“Considerable Amount’

“There’s market talk the franc may be pegged between 1.15- 1.20” per euro, said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “If that was the case, it would take a considerable amount of intervention.”

The U.S. currency weakened for a fifth day against the yen in its longest run of daily declines since June 8.

Japanese Finance Minister Yoshihiko Noda said the yen’s movements have continued to be one-sided even after the government sold the currency on Aug. 4 to curb its gains. He was speaking to lawmakers in parliament in Tokyo today.

The Federal Reserve said Aug. 9 that policy makers “discussed the range of policy tools” to strengthen growth and are “prepared to employ these tools as appropriate.” They pledged to keep the benchmark interest rate near zero until at least mid-2013.

The euro dropped earlier amid growing concern the region’s sovereign-debt crisis may spread to France. Banks’ overnight borrowings from the European Central Bank jumped to the highest in three months today, a sign some lenders may have need for emergency cash.

‘Under Attack’

“On a micro level, the banks have been under attack, and that’s a proxy for what’s going on with sovereign issues,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “Until there’s a resolution from policy makers on this front, there’s still too much uncertainty about what’s going on in the euro-zone banking sector.”

Credit-default swaps on France traded at a record 179 basis points. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The ECB bought Spanish and Italian bonds for a fourth day, according to traders familiar with the transactions, in an effort to keep the debt crisis from spreading to the countries.

China’s yuan gained beyond 6.4 per dollar for the first time in 17 years. It rose 0.4 percent to 6.3937 per dollar in Shanghai, breaching 6.40 for the first time since China unified official and market exchange rates at the end of 1993.

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The franc tumbled the most against the euro since the shared currency s 1999 debut after Swiss National Bank Vice President Thomas Jordan said a temporary peg to the euro would be legal as policy makers try to stem the franc s gains.The Swiss currency fell versus all of its...
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