August 11, 2011 / 7:05 PM / in 6 years

FOREX-Euro, dollar spike vs Swiss franc on currency peg idea

* Swiss franc dives as SNB eyes more steps to weaken it

* SNB’s Jordan says bank could peg euro/franc temporarily

* Yen near record high, markets on alert for intervention (Updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 11 (Reuters) - The dollar and euro jumped 6 percent against the Swiss franc on Thursday after falling to record lows this week, as the Swiss National Bank said it could peg the franc to the euro to rein in a soaring currency.

SNB Vice Chairman Thomas Jordan, when asked about temporarily pegging the franc said the bank was open to exchange rate measures consistent with long-term price stability. For his comments, see [ID:nL6E7JB026].

Traders said the euro/Swiss pair could be fixed at 1.15 francs. A Swiss currency peg, if it were to be taken, drew criticism from most market participants.

“Euro/Swiss has ripped higher on more talk about the Swiss pursuing a temporary peg with the euro. It remains difficult to tell how seriously this is being considered, but I continue to believe the broad concept is poorly conceived,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank in New York.

In early afternoon trading, the euro was up 5.1 percent at 1.08250 francs EURCHF=EBS, compared with a record low of 1.00750 set as recently as Tuesday. It rose as high as 1.09220 francs, up more than 6 percent on the day, on pace for its best trading day ever.

The euro was still down 0.3 percent this week and 13.2 percent lower so far this year.

The dollar was last up 4.8 percent to 0.76174 franc CHF=EBS also its best one-day gain, after hitting a high of 0.76895. Earlier in the week, the dollar plunged to a record low of 0.70676 on trading platform EBS.

Deutsche’s Ruskin said anchoring a currency on a fairly unstable euro, which is currently beset by worries about the euro zone debt crisis, could end up destabilizing the franc itself.

If the SNB were to do the peg, it would be “jumping into the old exchange rate mechanism in the midst of unprecedented turmoil, while probably being left to defend the band by itself, with limited solidarity from the others, in this case the European Central Bank,” he added.

Sharp gains in the euro versus the Swiss franc further helped lift the euro zone common currency against the dollar. The euro last traded up 0.4 percent at $1.42280 EUR=EBS.

The euro hit session highs near $1.43 after clearing house LCH.Clearnet cut the additional margin required on Irish government bonds on Thursday, citing a change in the risk premium on Ireland’s debt relative to a AAA credit rating. See [ID:nL6E7JB22P].

SWISS PEG, NEGATIVE INTEREST RATES

Other analysts said there may be no need to do the peg after all. Credit Suisse said Swiss franc Libor futures are already trading in negative territory. Spot Libors may also go negative as Swiss banks try to discourage foreign wholesale deposits, the bank added.

Negative interest rates, essentially forcing banks to charge clients to hold their money, could dissuade some investors from buying the safe-haven franc, although the peg could be limited.

“Markets are not holding Swiss francs for their return, they’re holding them for insurance,” said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. “So a slight negative interest rate may not discourage too much demand for the currency.”

The yen, meanwhile, hovered near a record high against the dollar as investors continued to sell riskier assets, fueling speculation Japanese authorities may step in to stem the yen’s gains.

The dollar fell as low as 76.302 yen JPY=EBS on trading platform EBS, within striking distance of an all-time trough of 76.25 yen set in mid-March. It last traded little changed on the day at 76.870.

Earlier in London trading, the dollar briefly jumped above 77 yen from 76.30 yen, after dealers cited talk that the Bank of Japan was in the market checking the currency exchange rate for dollar/yen. That is usually an indication that Japan is getting ready to buy more dollars to weaken the yen.

The greenback, however, soon fell back after traders said they had not seen any yen-selling intervention by Japanese authorities. A finance ministry official declined to comment. (Additional reporting by Wanfeng Zhou; Editing by Kenneth Barry)

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