Bloomberg News

Franc Gains on Bid for Refuge From Debt Turmoil; Euro Fluctuates

October 20, 2011

Oct. 20 (Bloomberg) -- The Swiss franc rallied against all of its major counterparts on demand for a refuge as Europe’s leaders struggled to achieve a resolution of the region’s sovereign debt turmoil.

The euro fluctuated versus the dollar after officials planned a second summit within three days of an Oct. 23 meeting to approve a plan that may include a combination of rescue funds. The Canadian and Australian dollars rose against the U.S. currency as U.S. stocks advanced, spurring some demand for higher-yielding assets.

“No one really knows exactly what’s going on, and it’s making people more anxious,” said Jessica Hoversen, an analyst at the futures broker MF Global Holdings Ltd. in New York. “You had a Sunday summit, and now it’s a Wednesday summit.”

The franc strengthened 0.9 percent to 1.2317 per euro at 5 p.m. New York time. The Swiss currency rose 1 percent to 89.38 centimes per dollar. The euro rose 0.2 percent to $1.3780 after earlier dropping as much as 0.8 percent. The U.S. currency was little changed at 76.80 yen after rising 0.4 percent.

One-month implied volatility on the euro versus the dollar rose to 15.8 percent, the highest level since Oct. 7, when Fitch Ratings downgraded Spain and Italy. Implied volatility for the currencies of the Group of Seven nations increased to 13.3 percent, also the highest since Oct. 7, according to a JPMorgan Chase & Co. index.

Gain in Stocks

The Standard & Poor’s 500 Index advanced 0.5 percent after dropping as much as 1 percent.

Canada’s dollar was the best performer after the franc among the 16 currencies trading versus the greenback. It rose 0.5 percent against its U.S. counterpart to C$1.0154. The Aussie added 0.1 percent to $1.0231.

German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to ask euro-region leaders to assess a “comprehensive and ambitious” package of measures to address the debt crisis at a summit this weekend in order to agree on the measures at a second meeting by Oct. 26, the German government spokesman Steffen Seibert said via e-mail.

European governments may deploy as much as 940 billion euros ($1.3 trillion) to contain the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said.

Paired-Funds Plan

Negotiations over pairing the two funds accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders.

“The markets would like to see some conclusion about what’s going to happen with the euro-zone crisis and how they’re going to address it,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “It’s the 11th and a half hour.”

Greek Prime Minister George Papandreou won the backing of a majority of lawmakers in a second test of support for a new austerity package. Papandreou secured the backing of at least 151 lawmakers in the 300-seat chamber, an initial tally of votes in parliament in Athens today showed. The result, if confirmed, would be enough for him to pass the bill.

The franc was the biggest winner today among the 10 developed-nation currencies that are tracked by Bloomberg Correlation-Weighted Currency Indexes, rising 0.9 percent. The euro dropped 0.1 percent, and the yen fell 0.2 percent.

‘Buying Pressure’

“Traders have until now been short the Swiss franc and long the yen, and now they’re trying to square those positions, which is putting selling pressure on the yen and buying pressure on the Swiss franc,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets under administration. “The uncertainty in Europe remains very high, and expectations are all over the place.” A long is a bet a currency may gain in value.

The franc remained 2.6 percent below the ceiling of 1.20 versus the euro imposed last month by the Swiss National Bank. The SNB announced the measure Sept. 6 and resumed purchases of foreign currencies to curb the franc’s gain, which was threatening exporters. The currency had rallied 13 percent this year a day before the central bank imposed the ceiling.

“The Swiss have a risk that they’re going to get totally buried,” said John Taylor, chairman and founder of the currency hedge fund FX Concepts LLC, in a London interview. They “were looking to buy time and have the euro solve itself, and that would make this thing very easy for them. But what happens if the euro doesn’t solve itself, which is what I believe is going to happen.” Taylor’s firm manages about $5 billion.

Philadelphia Fed

The dollar rose earlier versus the yen after the Federal Reserve Bank of Philadelphia’s general economic index increased to 8.7 in October from minus 17.5 last month in the biggest one- month rebound in 31 years. The median forecast of 58 economists in a Bloomberg News survey was for a reading of minus 9.4. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Japan plans to spend an extra 4 trillion yen ($52 billion) to cope with a surging yen that could damp an export-led recovery in the world’s third-largest economy, according to documents obtained by Bloomberg News.

The yen’s appreciation of almost 6 percent this year versus the dollar has prompted the government to adopt a multipronged approach to currency policy. While threatening intervention, Japanese authorities have offered aid to companies hit by the yen’s gain and highlighted the lower cost of making overseas acquisitions. Japan imports about 80 percent of its energy needs. The Bank of Japan has intervened in the currency market three times in the past 13 months.

--With assistance from Emma Charlton and Paul Dobson in London. Editors: Dennis Fitzgerald

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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