(Adds quotes, detail, updates prices)
* Sharp falls in equities prompt flight to safety
* Swiss franc eyes potential test of parity with euro
* Dollar supported versus commodity currencies
* Markets focus on FOMC announcement in U.S. session
By Neal Armstrong
LONDON, Aug 9 The Swiss franc surged to all-time
highs against the euro and the dollar in volatile trade on
Tuesday as fears of a global recession drove further
declines in already under-fire stock markets and kept safe-haven
currencies in high demand.
European stocks were down 5 percent at one stage in morning
trade as investors continued to dump risky assets across the
board following Wall Street's biggest selloff since December
2008, which prompted a massive flight to safety.
Markets have become deeply risk-averse in recent days after
Friday's S&P downgrade of U.S. sovereign debt and persistent
worries over the euro zone spooked investors and fuelled
concerns a global recession could be around the corner.
The euro tumbled through a low of 1.0605 francs
hit in Asian trade, dropping within seconds to its lowest on
record at 1.0475, according to EBS data. It was last at 1.0580
in volatile trade, down around 1.2 percent for the day.
Analysts said the franc looked likely to reach parity with
the euro, despite the Swiss National Bank's (SNB) recent easing
of monetary policy and warnings over the franc's strength, which
have triggered concerns over currency intervention.
"Parity looks pretty likely for euro/Swiss as long as there
is heightened risk aversion," said Tom Levinson, currency
strategist at ING.
"The SNB has been threatening but they had a terrible time
with intervention last time and the market is taking them on,"
The SNB is likely to be reluctant to intervene in currency
markets after attempts to weaken the franc when the euro fell
below 1.50 in the wake of the Lehman crisis left the central
bank sitting with heavy losses.
The franc also rose sharply to an all-time high versus the
dollar on EBS of 0.7359 francs before easing a touch to
Options markets showed implied volatility in the euro/Swiss
-- a measure of the market's expectations of future movements in
the currency pair -- at record levels of over 20 percent in the
one-month , after surpassing levels seen at the peak
of the Lehman crisis on Monday.
Analysts expected more liquid currencies to stay in favour
in a predominantly risk-off environment.
"Liquidity matters in the current environment so the Swiss
franc, the yen, the dollar and to some extent the euro will
remain well supported. They are large and liquid and don't have
the stretched positioning associated with carry currencies such
as the Aussie, kiwi and the Nordics," said Raghav Subbarao,
currency strategist at Barclays Capital.
Commodity currencies stayed under pressure following heavy
falls in the Asian session.
At one point the Australian dollar fell below parity against
the U.S. dollar, sliding to $0.9927 , its lowest in
about five months, but later recovered to $1.0157.
The Aussie has lost about 10 cents from a 29-year peak of
$1.1081 set just two weeks ago.
The dollar drifted to 76.991 , below levels where
Japanese authorities intervened heavily on Aug. 4. and not far
off the record low of 76.25 yen reached in mid-March. It was
last down 0.8 percent at 77.14 yen.
The dollar briefly spiked against the yen in Asia, fuelling
speculation that Tokyo authorities had stepped into the market
to follow up on last week's massive yen selling intervention,
but there were no sightings of official action on Tuesday.
Japanese Finance Minister Yoshihiko Noda said on Tuesday he
was watching markets with a sense of urgency after share prices
The euro gained some support after European Central Bank
President Jean-Claude Trichet said on Tuesday the ECB was
actively buying government bonds.
It was last up around 0.7 percent for the day at $1.4282.
The market's next focus is squarely on Federal Reserve
policymakers due to meet on Tuesday.
There has been talk that the Federal Reserve Open Market
Committee (FOMC) will discuss options for more measures to help
the economy, but the consensus view is that it will refrain from
any fresh stimulus after having completed a $600 billion
bond-buying programme, dubbed QE2, in June.
"The base case from the FOMC today is a suitably downbeat
commentary on the state of the economy. At this juncture,
floating the idea of QE3 seems unlikely and in any case an
inappropriate tool," said ING's Levinson.
(Editing by Susan Fenton)