The yen and the Swiss franc strengthened as Standard & Poor’s downgrade of the U.S., coupled with a deepening euro-region sovereign debt crisis, lifted demand for the safest assets. The dollar rose against a majority of its most-traded counterparts as investors sought the refuge of U.S. government debt even after the rating downgrade as global stocks fell. Yields on Treasury two-year notes reached a record low. Canada’s dollar fell for a seventh day versus the greenback as crude oil, the nation’s biggest export, plunged. “The concerns about weaker global growth are in fact helping to stimulate demand for Treasuries, so in an ironic way, even though the longer-term ramifications are negative, it is currently dollar-supportive,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “You are likely to see the yen and Swiss gains hold as there is an overriding concern in financial markets the global slowdown, and that supersedes anything else.” The yen gained 0.9 percent to 77.72 per dollar at 10:08 a.m. in New York, from 78.40 on Aug. 5, and climbed 1.6 percent to 110.19 per euro, from 111.97. The franc appreciated 1.3 percent to 1.0812 per euro and traded at 76.32 centimes per dollar, up 0.6 percent, after earlier touching a record high 74.85. The dollar strengthened 0.7 percent against the 17-nation currency to $1.4177. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.3 percent to 74.814, from 74.598. Implied Volatility Up Implied volatility, a key gauge of option prices that tends to rise in times of uncertainty, for euro-Swiss one-month options climbed to more than 20 percent. That’s above the previous high reached in October 2008, one month after the collapse of Lehman Brothers Holdings Inc. U.S. two-year note yields decreased as much as five basis points to an all-time low of 0.24 percent. Yields on 10-year notes fell eight basis points, or 0.08 percentage point, to 2.48 percent. S&P expects the dollar, “for lack of alternative if no other reason,” to retain its role as the world’s main reserve currency, John Chambers, chairman of the company’s sovereign- debt committee, said in an interview. The company kept the outlook on the U.S. rating at “negative” as it became less confident Congress will end tax cuts passed during President George W. Bush’s tenure or tackle entitlements. The rating may be cut to AA from AA+ within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based company said on Aug. 5 as it announced the downgrade after markets closed. Moody’s, Fitch Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended a debt-ceiling impasse. Moody’s and Fitch also said downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens. Traders cut bearish bets on the dollar last week from the highest level in more than two months. Aggregate wagers against the greenback fell for the first time since the period ended July 1, dropping to 307,321 contracts from 310,222, data from the Commodity Futures Trading Commission in Washington show. Futures traders added to bets the dollar will weaken against the yen, Swiss franc, Canadian dollar, U.K. pound, New Zealand dollar and ruble. Wagers on a drop versus the euro, Australian dollar and Mexican peso were trimmed. Short-Term Benefit “If markets get into a very risk-averse mode, then the dollar could benefit in the short term, but longer-term I think you still have a currency in the U.S. with an external deficit, very low interest rates and now even a lower credit rating, so it’s negative for the U.S. dollar,” said Marcus Hettinger, a foreign-exchange strategist at Credit Suisse Group AG in Zurich. The Federal Reserve meets tomorrow on monetary policy. Policy makers may address chances of further slowdown when the Federal Open Market Committee releases a policy statement. Group of Seven nations sought to head off a collapse in global investor confidence, saying in a joint statement today that they will take every action necessary to stabilize financial markets. Members agreed to inject liquidity and act against disorderly currency moves should such steps become necessary, Japanese Finance Minister Yoshihiko Noda said in Tokyo after a conference call with G-7 representatives. Volatility in currency markets climbed to the highest level since March, with the JPMorgan Global FX Volatility Index reaching 13.05. Canada, Australia The loonie, as Canada’s dollar is sometimes known for the image of the waterfowl on the C$1 coin, weakened to the lowest level since June. Crude oil for September delivery fell to as low as $82.52 a barrel in New York, the least since November, from $94.89 a week ago. The Canadian currency weakened 0.5 percent to 98.70 cents per U.S. dollar, compared with 98.20 cents on Aug. 5. It touched 98.86, the lowest level since June 27. The krone of Norway, another major oil exporter, was little changed against the dollar at 5.4828. Japan may have spent a record amount intervening on Aug. 4 to stem the yen’s gains, based on a projection of deposits held by financial institutions at the Bank of Japan. Noda said last week’s action was unilateral. A day earlier, Switzerland unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets to curb its appreciation. The Australian dollar dropped 1.6 percent to 80.53 yen and declined 0.8 percent to $1.0362. New Zealand’s currency sank 2.4 percent to 64.54 yen and fell 1.5 percent to 83.04 U.S. cents. ECB Buys Bonds The euro rose earlier against the greenback after the European Central Bank bought Italian and Spanish government bonds today, according to six people with knowledge of the transactions. The central bank isn’t buying Irish or Portuguese bonds, said one of the people, who asked not to be identified because the deals are confidential. A spokesman for the ECB declined to comment. Policy makers are being forced to step up their response after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout. Italian and Spanish 10-year yields reached euro-era records last week. In a statement issued yesterday in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the ECB called on all euro-area governments to follow through on measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market. To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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