Bloomberg News

Franc Rises to Record as U.S. Budget Impasse Spurs Refuge Bid

July 30, 2011

July 30 (Bloomberg) -- The Swiss franc rallied to records against the dollar and euro and extended its stretch of monthly gains versus the greenback to the longest in 17 years as the U.S. budget impasse and Europe’s turmoil spurred refuge demand.

The euro was the biggest loser among the most-traded currencies in July after Moody’s Investors Service said it may cut Spain’s credit ranking and the nation’s prime minister called an early election, renewing concern Europe’s fiscal crisis is spreading. The dollar approached a postwar low against the yen as the U.S. economy grew less than forecast.

“In the safe-haven mode, you’re seeing the Swiss franc and yen strengthen,” said Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York. “There’s a lot of negativity toward the U.S. right now, and we’re seeing the GDP numbers exacerbate the idea that the U.S. is in trouble if we get downgrade in a bad economy.”

The Swiss franc rose this month versus all of its most- traded counterparts, appreciating 7.8 percent to 1.1312 versus the euro, from 1.2189 on June 30, after touching 1.1298 yesterday, the strongest level since the European currency’s 1999 debut. The franc gained for a sixth month against the dollar, appreciating 7 percent to 78.55 centimes in the longest winning streak since June 1994 and touching a record 78.54 centimes.

The dollar dropped 4.7 percent to 76.77 yen after touching 76.73, the lowest level since touching a post-World War II record of 76.25 on March 17. The dollar fell 0.7 percent to $1.4399 versus the euro, from $1.4502. The 17-nation currency slid 5.4 percent to 110.54 yen, from 116.61.

Safety Rally

The franc and yen rallied this month versus their major counterparts as U.S. stocks tumbled, discouraging demand for higher-yielding assets. The Standard & Poor’s 500 Index tumbled 1.2 percent. Yields on 10-year Treasury notes fell yesterday to the lowest level this year.

“There is a lot of gloom out there,” said Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration. “It is quite firmly risk-off.”

New Zealand’s dollar gained 6 percent to 87.93 cents versus the U.S. currency after the Reserve Bank said this week it would likely remove a 0.50 percentage point “insurance” cut in the target lending rate made after a February earthquake. The kiwi touched 87.95 yesterday, the highest level since the currency was freely floated in 1985.

Record Aussie

The Australian dollar surged to a record $1.1081 on July 27 after a government report showed consumer prices rose in the second quarter more than economists forecast. The Aussie climbed 2.5 percent to $1.0993 in July.

Turkey’s lira, the biggest loser among more than 20 emerging-market currencies this month, fell yesterday after NTV reported the military’s chief of staff and commanders of the three main military forces resigned. The currency slid 4.1 percent to 1.6885 per dollar in July. Prime Minister Erdem Basci indicated this week that he’s ready to take steps to halt the currency’s retreat

The euro weakened this month versus all of its major counterparts after Spain’s Aa2 ratings were placed on review for possible downgrade by Moody’s yesterday.

Spain’s Prime Minister Jose Luis Rodriguez Zapatero, whose ruling Socialist Party has been losing support as he embarked on austerity measures, said yesterday at a news conference in Madrid that elections will be held Nov. 20 instead of March to “project political and economic certainty.”

Greece Aid

Euro-area leaders announced last week 159 billion euro ($229 billion) in new aid for Greece, with bondholders agreeing to contribute to the package. They also expanded the role of the 440-billion euro rescue fund to buy debt across distressed nations, assist troubled banks and offer credit lines.

“General fears are still high regarding the euro zone,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “There’s every reason to trade the euro weaker.”

President Barack Obama said yesterday Republicans and Democrats are in “rough agreement” on their plans to raise the U.S. debt limit with just days before a threatened default. An administration official said this week that the Treasury will give precedence to making interest payments on government bonds.

Slower U.S. Growth

Gross domestic product grew at an annual rate of 1.3 percent in the second quarter, the Commerce Department reported yesterday. The median forecast of 85 economists in a Bloomberg News survey was for a 1.8 percent advance.

Japan’s currency stayed higher versus the dollar this week after Jiji Press reported that Economy Minister Kaoru Yosano indicated intervention to weaken the yen was unlikely before the outcome of the U.S. deficit debate.

Group of Seven nations jointly sold the yen on March 18 after it surged to a record versus the dollar on the previous day, saying in a statement they wanted to reduce “excess volatility and disorderly movements.”

Volatility implied by one-month dollar-yen options increased yesterday to 11.25 percent, the highest level in more than two months.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Joe Ragazzo in New York at jragazzo@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

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


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