Bloomberg News

Franc, Yen Rally as Signs of Economic Slowing Fuel Haven Demand

June 01, 2011

June 1 (Bloomberg) -- The Swiss franc and the yen gained against their most-traded counterparts as weaker data from the U.S. to China increased concern the global economic recovery is slowing, boosting demand for haven assets.

The franc reached a record against the dollar and the euro after manufacturing in the U.S. and China grew at the slowest pace in at least nine months. Currencies of commodity-exporting countries weakened as raw material prices dropped and stocks slumped, damping demand for higher-yielding assets. The euro dropped after Moody’s Investors Service lowered its rating on Greek bonds.

“It’s a pretty nasty witch’s brew for risky assets,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. The franc and the yen “will strengthen in times of stress.”

The franc rose 1.3 percent to 84.28 centimes per dollar at 3:42 p.m. in New York, reaching 83.83 centimes, the strongest since at least 1971. It added 1.7 percent versus the euro, touching 1.20905, the most on record. The yen gained 0.7 percent to 80.95 per dollar, from 81.52 yesterday.

IntercontinentalExchange Inc.’s Dollar Index, which measures the greenback against the currencies of six trading partners, rose 0.2 percent to 74.78 after earlier dropping as much as 0.4 percent.

Franc Strength

The franc strengthened as retail sales rose in April at the fastest rate in two years, boosting speculation the Swiss National Bank may raise borrowing costs. The currency reached 1.20855 per euro, the strongest on record. Retail sales climbed 7.5 percent in the year after a 0.2 percent drop in March, the most since April 2009.

Canada’s dollar and Mexico’s peso dropped against most of their major counterparts on the weaker U.S. data. The U.S. is both nations’ biggest trading partner. The countries also both export commodities, such as oil.

The Canadian dollar fell 0.8 percent to 97.58 cents versus the greenback and the peso dropped 1.1 percent to 11.6987 per dollar.

The Standard & Poor’s 500 Index dropped 2.2 percent, snapping a four-day advance, and the Thompson/Reuters CRB Index of raw materials fell 1.2 percent.

Factory Output

The Institute for Supply Management’s factory index fell to 53.5 in May from 60.4 the prior month, the Tempe, Arizona-based group said today. Economists projected the gauge would drop to 57.1, according to the median forecast in a Bloomberg News survey. Estimates of the 83 economists polled ranged from 53 to 60.

China’s Purchasing Managers’ Index was at 52 from 52.9 in April, the lowest level since August, the China Federation of Logistics and Purchasing said in an e-mailed statement. The index has a seasonal pattern of falling in May, economists said before the release.

U.S. employment increased 38,000 last month, the smallest increase since September, from a rev last month after a revised 177,000 gain in April, according to figures from ADP Employer Services. The median estimate in the Bloomberg News survey called for a 175,000 advance for May.

The Labor Department will release May unemployment figures June 3. Goldman Sachs Group Inc. revised its estimate today for an increase in May nonfarm payrolls to 100,000 from 150,000, while Citigroup Inc. trimmed its projection to 100,000 from 170,000.

‘Consistently Weak’

“The data has been consistently weak and is really consistent with the view that the U.S. recovery has essentially stalled,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “That would certainly warrant ultra-accommodative policy from the Fed for the foreseeable future and that contrasts with expectations for the European Central Bank to lift rates again in July.”

The Fed has kept its benchmark interest rate at zero to 0.25 percent and won’t raise it until the first quarter of 2012, according to a Bloomberg News survey. Central banks in other developed-nations have begun tightening policy following the recession, including the European Central Bank and the Bank of Canada.

The euro extended its decline after Moody’s said it downgraded Greece’s local and foreign currency bond ratings to Caa1 from B1 and assigned a negative outlook to the ratings. European officials are trying to prevent the euro region’s first sovereign default as investors dump Greek bonds on concern the government won’t be able to meet its obligations.

European Debt

Investors may be offered preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, said two people with knowledge of discussions, who declined to be identified because the talks are in progress.

So-called negative incentives are also under consideration, such as cutting off old Greek bonds from eligibility for use as collateral with the European Central Bank, the people said.

The euro fell 0.4 percent to $1.4344.

The dollar may drop to less than 80 yen as Treasury yields extend declines, according to Greg Anderson, a senior currency strategist at Citigroup in New York.

“If the payrolls report comes in weak like the ADP report, and we get U.S. 10-year yields falling below 3 percent and two- year yields dive below 40 basis points, you’re probably going to see dollar-yen fall below 80 yen, with potential to go to 79 or 78 on a short-term dip,” Anderson said in a telephone interview. A basis point is 0.01 percentage point.

Yields on the Treasury 10-year notes fell to less than 3 percent for the first time in 2011.

--Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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