Swiss central bank sets floor for euro/franc exchange rate
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar turned up on Tuesday, with the euro relinquishing prior gains versus the greenback after the Swiss National Bank shocked markets by setting a floor on the euro exchange rate versus the Swiss currency at 1.20 francs.
The move triggered a dramatic round of short-covering in the euro-Swiss franc cross, lifting the euro EURCHF +8.52% from around 1.12 francs to more than 1.20 francs. It changed hands at CHF1.2028 in recent action, a gain of 8.9% on the day.
The euro EURUSD -0.14% jumped as high as $1.4281 against the dollar just after the decision, then erased the move to slip about 0.1% to $1.4056 versus the dollar.
The 17-nation shared currency held most of its gains against the Japanese yen EURJPY +0.54% , rising 0.7% to buy 108.88 yen.
The dollar jumped almost 9% versus the Swiss franc USDCHF +8.60% to buy 85.59 centimes. One-hundred centimes equals a Swiss franc.
The dollar index DXY +0.53% , which measures the greenback against a basket of six currencies, rose 0.5% to 75.607 from Monday, when U.S. markets were closed for a holiday.
The dollar also gained 0.7% on the safe-haven Japanese yen USDJPY +0.72% to trade at ¥77.51.
“The move in euro-Swiss triggered ‘risk-on’ across the board, erasing earlier losses in risk proxies [and] sending euro-dollar, dollar-yen and all risky foreign exchange higher,” said Elsa Lignos, senior currency strategist at RBC Capital Markets in London. “We do not think that move will last.”
Lignos said ongoing troubles in the euro zone and a generally risk-averse environment were likely to keep upward pressure on the Swiss franc, setting up a test of the SNB’s resolve to enforce the floor.
“The central bank said in its announcement that it is willing to buy unlimited foreign currency and will defend its FX target with “utmost determination”, as the current massive overvaluation of the Franc is posing deflation risks,” said strategists at Brown Brothers Harriman.
The announcement comes after Swiss inflation fell again, adding an incentive for the Swiss central bank to act in order to deflect the risk of deflation.
“The SNB is running out of options with rates already at almost zero and other measures appearing feckless,” analysts at Brown Brothers wrote in a note.
The Fed, ECB and Obama
The move helped the dollar gain for a fifth day, excluding Monday’s session when U.S. markets were closed, as worries about Europe’s ability and willingness to resolve its debt crisis and a disappointing U.S. nonfarm payrolls report deflated confidence over the global economic outlook and pulled investors toward asset classes perceived to be relatively safer
Traders may increasingly turn to see what actions may be taken by the European Central Bank as well as the U.S. Federal Reserve and U.S. President Barack Obama, said strategists at Credit Agricole.
While it’s unlikely that either the Fed or the president will oblige investors, “all of this highlights just how ugly the U.S. dollar looks, but fortunately for the currency, the euro is looking even more unsavory,” they said.
Other major currencies also spiked higher after the Swiss announcement, only to fade those moves.
The British pound GBPUSD -0.59% recently turned down 0.4% to $1.6038.
The Australian dollar AUDUSD -0.01% traded up 0.2% at $1.0535. It rose much higher in Asian trading session after the Reserve Bank of Australia on Tuesday kept its policy interest rate at 4.75% as recent turbulence in financial markets outweighed worries about the prospect of rising inflation. Read about the RBA’s rate decision.
Deborah Levine is a MarketWatch reporter, based in New York.
