Franc Reaches Record Versus Dollar on U.S. Debt Ceiling Impasse; Yen Gains

Switzerland’s franc strengthened to a record against the dollar on demand for the safest assets as U.S. lawmakers failed to agree on raising the nation’s $14.3 trillion debt ceiling and Greece’s credit rating was cut.

The franc also appreciated toward a record versus the euro, while the yen rose against 15 of 16 major peers. U.S. Republicans and Democrats discussed dueling plans for raising the debt ceiling and cutting the nation’s deficit, seeking to break a partisan stalemate amid market concern about a potential default Aug. 2. The euro slid against the yen as Moody’s Investors Service downgraded Greece to its second-lowest rating.

“People just do not want to own euros or dollars,” said John McCarthy, managing director of currency trading at ING Groep NV in New York. “We’ve seen sharp strengthening in both the Swiss franc and the yen and some relative strength in Aussie, kiwi and Canada.”

Switzerland’s franc gained 2.1 percent against the dollar to reach a record 80.21 centimes and was 1.6 percent stronger at 80.61 centimes as of 5 p.m. in New York. Versus the euro, the franc appreciated 1.5 percent to 1.15885. It reached a record 1.13737 on July 18.

The dollar weakened 0.3 percent to 78.29 yen after reaching 78.06, the least since March 17. The U.S. currency fell 0.1 percent to $1.4377 against the euro. The euro fell 0.2 percent to 112.55 yen.

Finding Alternatives

Higher yielding currencies, which tend to underperform in periods of elevated risk, rose against the dollar as investors sought countries with more attractive and stable balance sheets.

“The old trade of risk-on, risk-off by the commodity currencies may be replaced by a more sober view of their balance sheets,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “It’s a recognition of currencies whose economies have better balance sheet positions than the U.S.”

Canada’s dollar was little changed against the dollar at 94.72 cents per U.S. dollar after gaining as much as 0.5 percent. The rand snapped a four-day advance and depreciated as much as 1.1 percent, the most in a week, to 6.8475 per dollar.

Franc Gains

The franc gained 1.6 percent today, making it the best performer according to Bloomberg Correlation-Weighted Currency Indexes, which track the currency against nine developed nations. The yen added 0.2 percent, while the dollar was 0.2 percent weaker, the indexes show.

U.S. House Speaker John Boehner’s two-step debt-limit plan would raise the U.S. borrowing limit by up to $1 trillion and later by about $1.6 trillion while requiring $1.2 trillion in spending cuts in the first phase and up to $1.8 trillion in the second step, according to Republican aides. President Barack Obama has threatened to veto a two-step extension to the debt ceiling.

Senator Majority Leader Harry Reid said he will introduce a plan that would cut $2.7 trillion in spending. The debate has fueled concern the nation is lurching toward a default as early as Aug. 2 and jeopardizing its AAA credit rating.

“Politicians have shot themselves in the foot in that the government will prioritize its payments,” said Jessica Hoversen, a New York-based analyst at the futures broker MF Global Holdings Ltd. “They’ve used it as a bargaining chip and now the market is so focused on it.”

Secretary of State Hillary Clinton today reassured China, the top foreign holder of American debt, that the U.S. will resolve the impasse, while People’s Bank of China adviser Xia Bin said he remains confident an agreement will be reached.

Dollar Index

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound fell 0.1 percent to 74.111. The index reached 73.889 on July 21, the lowest since June 9.

The euro dropped for the first time in three days against the franc after Moody’s slashed its long-term foreign-currency debt rating on Greece to Ca from Caa1. The European Union support package for Greece allows an “orderly default” and buys time, Moody’s said.

“People are looking at the problems in Europe as the crisis is far from over,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “Greece was downgraded again and that has led to a little bit of a flare up in peripheral tensions. People are still a little bit cautious.”

Italian and Spanish securities slid amid concern euro-area leaders may struggle to win support for the measures from euro- area members.

Italy’s 10-year government bond yield surged 26 basis points to 5.66 percent after reaching a euro-era record of 6.027 percent July 18. The Spanish 10-year yield jumped 26 basis points to 6.03 percent.

Gains in Japan’s currency were limited after it reached levels that spurred coordinated selling of the currency in March. Bank of Japan Governor Masaaki Shirakawa said today that the yen’s strength could hurt the economy and the central bank is ready to take appropriate action as needed.

Group of Seven nations jointly sold the yen on March 18 after it reached a postwar record of 76.26 to the dollar the previous day, saying in a statement they wanted to reduce “excess volatility and disorderly movements.” Japan’s Finance Ministry sold 692.5 billion yen that month in its first currency intervention since September.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net.

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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