NEW YORK (Reuters) - The dollar fell broadly, plunging more than 5 percent against the Swiss franc at one point on Tuesday, as the Federal Reserve’s pledge to keep rates near zero for another two years further diminished its allure to global investors.
It was a volatile trading day, with the dollar initially
rising versus commodity currencies such as the Aussie and New Zealand dollars after the Fed’s statement and the euro trimming gains. But that reversed in late trading as U.S. stocks rallied sharply.
Analysts said it was once again an affirmation to sell the dollar.
“We view the (Fed) statement as aggressively dovish, even beyond our expectations,” said Dan Dorrow, head of research at Faros Trading in Stamford, Connecticut.
“This is euro/dollar positive and equity-positive because the explicit two-year period, until mid-2013, for ‘on rock-bottom-hold’ will anchor the short-end of the dollar yield curve and impact euro/dollar interest-rate differentials.”
Global investors were initially disappointed that the Fed offered no new ideas to stop the U.S. economy from sliding back into recession. They were hoping for more aggressive bond purchases to boost a flagging economy.
“What surprised me about the Fed statement was how negative it was. There was a contingent of people that were hoping that the Fed will pull out some sort of magic bullet to stimulate the economy,” said Jeffrey Sica, president and chief investment Officer of SICA Wealth Management in Morristown, New Jersey, which has $1 billion of assets under management.
“Investors sold off because they’re hit with the fact that ‘Wow, we are really in a recession’ and there may be no overnight cure.”
The dollar fell to an all-time low of 0.70676 franc on trading platform EBS after the Fed statement and was last at 0.71955, down 4.7 percent. The greenback has lost nearly 23 percent of its value against the franc so far this year and there seems to be no let-up in selling.
It was the worst trading day ever for the dollar against the Swiss franc.
The euro dropped to its lowest on record as well at 1.00750 francs and last changed hands at 1.03380 francs, down 3.4 percent for the day.
Investors are now on high alert for any intervention from the Swiss National Bank to slow the surging Swiss currency.
The SNB, though, may be reluctant to intervene 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.
One-month implied volatility in euro/Swiss -- a measure of the market’s expectations of future movements in the currency pair -- hit record levels of more than 32 percent.
The euro has fallen about 15 percent versus the franc IN 2011. Analysts said the euro could reach parity with the franc, despite the SNB’s recent move to cut interest rates and warnings over the franc’s strength.
The euro, however, gained 1.3 percent against the dollar to $1.42600.
The dollar fell as low as 76.700 yen on EBS, not far from a record low of 76.15 yen reached in mid-March. It last traded at 76.980, down 0.9 percent. Last week, Japan intervened when dollar/yen was trading around 77.10 yen.
Japanese Finance Minister Yoshihiko Noda repeated on several occasions that he was watching markets closely, but said authorities would wait to see market reaction to the U.S. Fed decision before deciding whether to act again.
“Once the dust settles on this latest global panic, the dollar is going to be the lead funding currency (in carry trades) with no interest-rate risk through next year,” said Jay Meisler, co-founder of Global-View.com, a forex discussion site.
“This is a big assumption, but if things stabilize, it is hard to make a case for holding dollars.”
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Wanfeng Zhou; Editing by Jan Paschal