The Swiss franc is emerging as the currency markets' number-one safe retreat in times of stress as the allure of other so-called safe havens dims. Traditionally, the Swiss franc has shared its status as a bolt hole with the Japanese yen and the dollar. All three have a long history of attracting inflows amid stress in financial markets and geopolitics. But now, as the dollar continues to defy expectations of a move higher and as the Japanese yen's appeal is dented by the clear threat of central-bank intervention, the Swiss franc looks like the only safe-haven bet left. "Even though we see the franc as overvalued at these levels, its safe-haven status is supported by fundamentals, and by the fact that the Swiss central bank will probably also start its monetary-tightening cycle this year," said You-Na Park, a currencies analyst at Commerzbank in Frankfurt. The yen has also been benefiting from flights to safety, and a bit too much of them too. The Japanese currency strengthened to its highest level against the dollar, pushing the greenback to an all-time low against the yen at JPY76.25 last Thursday. This move triggered coordinated action from the Bank of Japan and central banks in the Group of Seven most industrialized countries, in a bid to cap the Japanese unit's stellar rise. The intervention was the first such attempt since 2000, with the Bank of Japan selling the yen and buying dollars last Friday, followed by several European central banks at the start of London trading hours. The U.S. Federal Reserve and the Bank of Canada also joined in during U.S. trading hours. The central banks said the intervention was aimed at stabilizing volatility in the yen and not defending a price floor, but Japan has pledged to take action again if needed, and analysts generally see more intervention if the dollar sinks to the Y80 level again. Last week, as effects of political turmoil in the Middle East and North Africa rippled through financial markets and a devastating earthquake and tsunami shook the world's third-biggest economy, the dollar sank to CHF0.8852, while the euro traded as low as CHF1.2401. As the Japanese nuclear situation threatened to get out of control, investors scurried to buy the Swiss currency against a falling dollar. In fact, the greenback weakened against all major currencies since the earthquake struck, and a weaker dollar in the face of global uncertainty is highly unusual. "I have never seen anything like this," said Kit Juckes, a currency strategist at Societe Generale in London. On Monday, the ICE Dollar Index, a trade-weighted measure of the dollar's value against a basket of currencies, sank to a 15-month low to hit 75.365. This fall from grace is largely the result of the surging euro, which makes up the majority of the dollar index. "The accumulation of risks should have provided plenty of scope for dollar upside, but the greenback's performance has been disappointing. This has led to suspicions that the dollar is neither a safety play nor a growth currency," UBS said in a note to clients. Analysts suspect that a shift in behavior by reserve managers might be behind the dollar's unfavorable performance. Asian central banks and China in particular have been busy diversifying their dollar holdings into other currencies, mainly buying the euro. "China has a vested interest in keeping the euro competitive against the dollar. This is clearly visible when looking at reserve managers' recent behavior," said Juckes, adding that this desire to diversify away from the dollar might explain a weaker greenback despite a severe geopolitical crisis. Analysts at French bank BNP Paribas agree and say that China is likely to keep buying the euro against the dollar, in an attempt to keep the yuan's rise under control. "This applies even more so after having seen the BOJ and other G-7 central banks drawing a line into the sand in respect of the yen," BNP Paribas said in a note to clients, foreseeing a continued run of weakness in the dollar. In times of market stress, this leaves market participants with no safe-haven currency to buy but the Swiss franc, presumably much to the consternation of the Swiss National Bank.

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