Bloomberg News

Franc Depreciates as Haven Bets Unwind; Euro Set for Weekly Gain

July 01, 2011

July 1 (Bloomberg) -- The Swiss franc weakened against its 16 most-traded peers as investors sought higher-yielding currencies amid confidence policy makers and bankers have staved off a Greek default.

The currency slid for a fifth day versus the euro as data showed Swiss manufacturing growth slowed. The euro was poised for its first weekly gain in a month versus the dollar as Greek Prime Minister George Papandreou won approval for an austerity plan needed to keep aid flowing, while German banks agreed to roll over Greek bondholdings maturing through 2014. The Dollar Index was set for its biggest weekly drop since the first week of June.

“The risk of a default has really fallen significantly and Greece is moving in the right direction, so that’s why we’re seeing traders reduce their safe-haven bets and buy euros and other currencies,” said Kathy Lien, director of currency research with online currency trader GFT Forex in New York.

The franc tumbled 1 percent to 1.2308 versus the euro as of 2:56 p.m. in New York. It depreciated 1 percent against the dollar to 84.85 centimes.

The euro rose 0.1 percent to $1.4512. It’s set for a 2.3 percent weekly advance versus the dollar. The European currency climbed 0.4 percent to 117.33 yen. The dollar rose 0.4 percent to 80.85 yen.

Factory Reading

The European currency fell as much as 0.5 percent after Institute for Supply Management’s factory index showed U.S. manufacturing unexpectedly expanded at a faster pace in June. The measure rose to 55.3 last month from 53.5 in May, the Tempe, Arizona-based group said today.

“This is a really strong number for the U.S.,” said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co. “You’re getting a little bit of selling pressure on the euro just based on how strong the U.S. ISM numbers were.”

The carry trade of selling dollars to buy the currencies of Norway, Australia, Canada and New Zealand has more than tripled this week as investor appetite for higher-yielding assets increases. The trade returned just 21 percent during June.

In carry trades, investors buy higher-yielding assets with amounts borrowed in nations with low interest rates. The Federal Reserve’s benchmark interest rate of zero to 0.25 percent makes the dollar popular for funding such transaction.

Canada’s dollar strengthened as much as 0.3 percent against its U.S. counterpart to the highest level since May 12. The loonie, as the currency in nicknamed, appreciated to 96.09 cents versus the greenback.

ECB Rates Outlook

The Procure.ch Purchasing Managers’ Index fell to 53.4 in June from 59.2 in May when adjusted for seasonal swings. That’s the lowest since September 2009, suggesting the Swiss economy may struggle to maintain its expansion pace.

The euro was supported as traders increased bets the European Central Bank will tighten monetary policy, pushing euribor futures lower. The implied yield on the March 2012 contract rose four basis points to 2.01 percent.

“The Europeans are trying to avoid default, but are not choosing devaluation; in the U.S., the Federal Reserve would rather see the dollar weaken and help create jobs and is assuming that won’t create too much inflation,” Kit Juckes, head of currency strategy at Societe Generale SA in London, said during a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

‘Weaker Dollar’

“As long as that choice is there, unless there’s a disaster in the global economy that makes everyone just run and put their money under a mattress, then we will end up with a weaker dollar,” Juckes said.

Investors expect the ECB to increase interest rates by 76 basis points during the next year, up from a forecast 16 on June 22, according to a Credit Suisse Group AG index based on swaps.

ECB President Jean-Claude Trichet reiterated yesterday that policy makers are in a state of “strong vigilance” against inflation, highlighting chances of a rate increase at their meeting on July 7. The central bank raised its key rate in April for the first time in almost three years, lifting it by a quarter point to 1.25 percent.

“The Swissie was quite a good safe-haven currency, especially if you wanted to flee the euro because of its short- term risks,” said Ulrich Leuchtmann, head of foreign-exchange strategy at Commerzbank AG in Frankfurt. “With the short-term risks in the euro zone having abated, this shift should be unwound. We’ll see a weaker Swissie as long as we have no more event risk from the euro zone.”

The euro is the third-best-performing currency this year against a basket of nine developed-market peers, appreciating 2.9 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The U.S. dollar posted the worst performance, dropping 6 percent, the indexes show,

The Thomson Reuters/University of Michigan final index of U.S. consumer sentiment fell to 71.5, from 74.3 in May. The gauge was projected to decline to 72, according to the median forecast of 57 economists surveyed by Bloomberg News. The index for June compares with a preliminary reading of 71.8.

--With assistance from Catarina Saraiva in New York. Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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


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