* SNB to buy foreign currencies to avert deflation risks
* SNB move to benefit other European emerging markets
* U.S. retail sales were better than expected (Updates prices, adds comments)
By Gertrude Chavez-Dreyfuss
NEW YORK, March 12 (Reuters) - The U.S. dollar and euro jumped against the Swiss franc on Thursday after the Swiss National Bank said it was intervening in the market as it faced the growing risk of deflation.
In a statement, a spokesman for the Swiss central bank said it was “implementing” its decision to buy foreign currencies. The SNB also cut interest rates on Thursday by a quarter point to a historic low, offering three-, six- and 12-month funds at 0.05 percent.
The SNB, which last intervened in August 1995, further said it will buy not only foreign currencies but bonds as well.
Switzerland is facing its worst recession in over three decades. For the SNB statement, click on [ID:nSNBTEXT].
In midday New York trading, the dollar rose 3.2 percent to 1.1905 francs CHF=, on track for its biggest one-day gain since August 1995. It rose as high as 1.1965 francs, a three-month high, according to Reuters data.
The Swiss franc is one of the world’s most traded currencies, at times prized as a safe haven for investors.
The euro climbed to 1.5302 Swiss francs, the highest since December. It las traded at 1.5196 EURCHF=, up 2.7 percent, the euro’s best day ever against the Swiss currency.
SNB’s move to zero rates and quantitative easing was expected, traders said, but the immediate move to intervene was a surprise.
Bank of New York-Mellon senior currency strategist Michael Woolfolk said “the way this was communicated was intended at maximizing its shock value.” He said there were no hints from SNB officials ahead of time that intervention would be immediate.
“They changed their economic outlook, they not only lowered interest rates to effectively zero but also announced quantitative easing and currency intervention. This was the full monty,” Woolfolk said.
Quantitative easing has been deployed by central banks in countries including Britain, where the central bank is buying assets with newly created money.
Marc Chandler, global head of FX strategy, at Brown Brothers Harriman in New York said the SNB intervention should ease pressure on Poland and Hungary, two European emerging market countries seriously hit by the global credit crisis.
These two countries had taken advantage of ultra-low Swiss interest rates, borrowing heavily in Swiss francs and investing in riskier assets.
“The strength of the Swiss franc compounded their woes. Today’s dramatic weakening of the Swiss franc may ease this pressure,” said Chandler.
Gains in the dollar versus the Swiss franc boosted the greenback against other major currencies such as the euro and sterling.
The euro fell 0.4 percent to $1.2774 EUR=. The single currency was also pressured by comments from European Central Bank President Jean-Claude Trichet that euro zone interest rates could be cut further. See [ID:nLC956324].
The ECB cut its benchmark rate to a record low at 1.5 percent last week and economists expect another reduction to 1.0 percent, most likely in April.
Sterling fell 0.4 percent to $1.3800 GBP=.
The SNB news overshadowed all other events and data in the market including U.S. retail sales numbers that were better than expected and weekly jobless claims data that were not far from analysts’ forecasts. See [ID:nN12352975]
Against the yen, the dollar erased early losses, partly because of firmer U.S. stocks, still one of the key drivers in the currency market. Stocks were lifted by energy shares and the U.S. retail sales report. The dollar rose 0.6 percent to 97.72 JPY=. (Additional reporting by Steven C. Johnson; Editing by Walker Simon)