Franc Advances as Central Bank Disappoints on Peg; Dollar Drops
August 17, 2011, 5:56 PM EDTBy Allison Bennett
Aug. 17 (Bloomberg) -- The franc rose against 13 of its 16 most-traded counterparts after the central bank refrained from pegging it to the euro or adopting a target.
The dollar fell to a three-week low versus a basket of currencies of major U.S. trading partners. The Swiss currency briefly erased gains before a government briefing, then rallied as Finance Minister Eveline Widmer-Schlumpf said any decision on a target for the currency is up to the Swiss National Bank. Norway’s krone and South Africa’s rand and climbed versus the dollar as commodities rose.
“The SNB is being viewed as a bust because the market priced in a peg, and it seems like it’s not going to be their panacea and they’re going to avoid it if at all possible,” said Jessica Hoversen, a New York-based analyst at the futures broker MF Global Holdings Ltd. “There is no conviction in the market to buy the dollar today.”
The franc appreciated 0.8 percent to 79.01 centimes per dollar at 5 p.m. in New York, after briefly erasing gains before the government press briefing. It touched a record 70.71 centimes on Aug. 9. The Swiss currency advanced 0.6 percent to 1.1398 per euro after falling 0.8 percent earlier. It reached a record 1.0075 per euro on Aug. 9.
The Dollar Index, which IntercontinentalExchange Inc. uses to trade the greenback against currencies including the euro and yen, fell 0.4 percent to 73.745, from 74.010 yesterday. It touched 73.452, the lowest level since July 27.
The greenback weakened 0.1 percent to $1.4426 per euro, from $1.4407. It fell 0.3 percent to 76.60 yen and touched 76.41, approaching its post-World War II low of 76.25 yen reached on March 17.
‘Without a Paddle’
The Thomson Reuters/Jefferies CRB Index of raw materials climbed 1.2 percent.
“The markets are now going to force the SNB’s hands to see what they would do if they take the franc stronger -- the SNB is rowing upstream without a paddle,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “Clearly the central bank’s actions were very disappointing.”
The dollar sell-off came after foreign-exchange traders had reduced bets against the dollar in the week ended Aug. 9 by the most on record as global growth concerns sent demand for U.S. Treasuries soaring.
“The basic position was long risk-correlated currencies, short dollars, and that position was cut substantially -- and now they are tentatively getting bought back,” said Steven Englander, head of Group-of-10 currency strategy at Citigroup Inc. in New York. Long positions are bets that currencies or securities will increase in value, while short positions are wagers that they will weaken.
Record Drop
Aggregate bets the greenback will weaken against the euro, the yen, the Australian, Canadian and New Zealand dollars, pound, franc and Mexican peso had plunged by 154,105 contracts to 153,216, the biggest drop ever in Commodity Futures Trading Commission data compiled by Bloomberg beginning in 2003.
The dollar has slumped 6.9 percent this year, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The franc has strengthened the most, gaining 12 percent.
Norway’s krone advanced against most of its major counterparts as crude oil rose to its highest level in almost two weeks. Crude for September delivery rose as much as 2.7 percent to $89 a barrel in New York.
The krone gained 1 percent against the dollar to 5.391 and appreciated 0.8 percent to 7.7777 per euro.
Swedish Krona
Sweden’s krona gained 1 percent to 6.3296 per dollar, and the South African rand strengthened 0.9 percent to 7.0925 to the greenback.
Swiss Economy Minister Johann Schneider-Ammann said the government will use 2 billion francs ($2.5 billion) to boost the economy in the face of the currency’s strength. He and Widmer- Schlumpf spoke at the briefing in Bern.
“The SNB today was pretty disappointing, and the press conference didn’t give the market what it was looking for,” said Chris Walker, a currency strategist at UBS AG in London.
The Swiss central bank said earlier it will raise banks’ sight deposits, cash available for immediate withdrawal, to 200 billion francs ($254 billion) from 120 billion francs, continue to repurchase outstanding SNB bills and use foreign-exchange swap transactions, it said in an e-mailed statement from Zurich.
Policy makers unexpectedly cut interest rates Aug. 3 to help curb the franc’s gains, dropping the target for the three- month Swiss franc London interbank offered rate to “as close to zero as possible” from 0.25 percent.
Negative Swap Rate
The Swiss two-year swap rate -- the rate to exchange fixed for floating interest-rate payments denominated in the franc -- turned negative today for the first time as the SNB boosted liquidity to the money market.
“What the market is doing is making the move to negative interest rates for the SNB,” said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading. Even with the decline in rates, “people still are buying Swiss securities out of fear and wealth preservation anxiety.”
U.S. producer prices rose last month more than forecast. Labor Department data showed a 0.2 percent advance in the producer-price index, after a 0.4 percent drop in June. Economists forecast a 0.1 increase, according to the median estimate in a Bloomberg News Survey.
Consumer prices increased 0.2 percent last month following a 0.2 percent decline in June, according to the median forecast in a Bloomberg survey of economists before a Labor Department report tomorrow.
--Editors: Greg Storey, Dennis Fitzgerald
To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
