By William L. Watts and Virginia Harrison, MarketWatch
FRANKFURT (MarketWatch) — The euro gained ground versus major rivals and rebounded sharply versus the Swiss franc after Switzerland’s central bank effectively cut its key lending rate and took other steps aimed at curtailing its currency’s rise to record levels.
The euro EURCHF +2.75% traded at 1.1092 Swiss francs, a gain of 2.1% from Tuesday, after the SNB announced it would target its official interest rate as close to zero as possible. It also said it would boost Swiss franc liquidity in the money markets, a move strategists said was a form of quantitative easing.
The SNB, which said a “massively overvalued” franc was threatening the economy, also left open the option of physical intervention. The SNB said it was watching foreign exchange markets closely and would take further actions if needed.
The euro had earlier set a new all-time record low versus the Swiss currency below 1.08 francs. The dollar USDCHF +1.86% had earlier notched an all-time low above 76.00 centimes. There are 100 centimes in a franc.
The dollar changed hands at 77.68 centimes in recent action, up 1.5%.
SNB action had been widely anticipated, but the measures may have only limited effectiveness as long as the euro remains under pressure due to the euro-zone’s ongoing sovereign-debt crisis, analysts said.
The measures are “a correct and cheap way for the SNB to try and offset the damaging impact of Swiss franc strength,” said Jane Foley, senior currency strategist at Rabobank in London. “That said, although today’s actions will weaken the fundamental attractiveness of the franc, the SNB will be well aware that it is swimming against the tide and that without a solution to the euro-zone sovereign debt crisis it will be difficult to convince investors to dump the Swiss franc.
The euro EURUSD +0.85% stood at $1.4264 versus the dollar, up from $1.4196 late North American trade Tuesday.
Rising Italian and Spanish bond yields, due to a combination of growth worries and risk-aversion, have reinvigorated concerns that the euro-zone’s debt crisis could spread to two of Europe’s major economies. Read more on the return of euro-zone debt jitters.
The euro/U.S. dollar pair “remains stuck within a familiar trading range ($1.4150 to $1.43), but with swings continuing in between and an underlying bearish tone,” wrote strategists at UniCredit Bank in Milan. “A return towards mid-July’s low at $1.3850 still has a greater chance of occurring than a rally well above $1.4350 as long as EMU woes prevail.”
The greenback USDJPY -0.01% bought 77.24 Japanese yen, up from ¥77.06, in late North American trading Tuesday, amid speculation that the Bank of Japan will intervene to stem the rise of the nation’s currency.
The Japanese central bank intervened in currency markets in the wake of the March earthquake and tsunami, when the yen hit an all-time low of ¥76.25.
The Bank of Japan holds a two-day policy meeting concluding Friday, and strategists at Capital Economics said while “an intervention is highly likely, we do not expect the Bank of Japan to follow up with any new policy initiatives, for now at least.”
In the U.S., Moody’s Investors Service confirmed the U.S.’s triple-A rating following the increase in its debt ceiling, but assigned a negative outlook on the rating, late Tuesday. Read more on Moody’s confirming the U.S.’s triple-A rating.
“Rating agency behavior is getting harder and harder to predict as the crisis wears on,” Win Thin from Brown Brothers Harriman said. “Outside of the U.S., we continue to see downgrade risk ahead in France, U.K., Belgium and Japan. Within the euro-zone periphery, Spain, Italy, Ireland and Portugal all face significant downgrade risk still, while Greece appears correctly rated for now.”
The British pound GBPUSD +0.56% rose 0.5% versus the dollar to change hands at $1.6367. Activity in Britain’s dominant services sector unexpectedly accelerated in July, according to the Markit/CIPS purchasing managers index for the sector released Wednesday.
The index rose to 55.4 from 53.9 in June.
The dollar index DXY -0.72% , which compares the U.S. unit against a basket of six currencies including the franc, yen and euro, stood at 74.265, down from 74.496 late Tuesday.
The Australian dollar AUDUSD -0.26% fell to $1.0762, from $1.0791 late Tuesday, as investors unloaded risky assets.
