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Franc Gains Versus Euro as Concern Returns Over European Debt

The Swiss franc strengthened against the euro and dollar on renewed speculation that some banks in the euro region may incur deeper losses spurred by the financial crisis, stoking demand for the currency as a haven.

The franc gained the most in 10 days versus the euro after John Gormley, leader of Ireland’s Green Party, said today the country’s bond spreads would widen should Ireland consider renegotiating with bondholders of Anglo Irish Bank Corp. Yields on Irish 10-year bonds rose to a record relative to those of benchmark German bunds.

“We’ve seen a few media reports about the periphery of the euro region, which has led to the euro falling back generally,” said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. “Although we’ve seen the euro rebounding recently, it’s by no means out of the woods. The longer-term concerns will remain, and put the euro-Swiss back under pressure again.”

The franc strengthened 0.8 percent to 1.3183 per euro as of 4:13 p.m. in London. It reached 1.2766 on Sept. 8, the strongest on record. The franc appreciated 0.6 percent versus the dollar to 1.01.

The franc has strengthened this year as investors bought the currency and other securities seen as havens on concern that the global recovery is faltering. SNB policy makers had to weigh the threat to export competitiveness from the currency’s gain against the risk of inflation as the economy recovers.

It climbed 3.9 percent this year against a basket of currencies, according to Bloomberg Correlation-Weighted Currency Indexes.

‘Change in Tone’

The currency this week depreciated 1.9 percent versus the euro, its steepest weekly loss since May 21, as the Swiss National Bank kept its benchmark interest rate unchanged at 0.25 percent and said the recovery “is not yet sustainable.” The MSCI World Index rose for a third week, gaining 1.7 percent.

“The SNB yesterday signaled a complete change in tone, warning of slower growth,” said Stannard. “Previously they had been preparing the market for rate hikes; this was far more dovish. Hikes are off the table, which has led to the franc coming under pressure. We expect euro-Swiss to extend gains.”

The Bank of Japan this week intervened to reduce the value of the yen for the first time since 2004.

“We are concerned that the SNB might also view the trade- weighted level of the Swiss franc as being too strong,” Morgan Stanley analysts led by Stephen Hull in London said in a report on Sept. 15. The bank ended a recommendation to sell the euro against the franc, citing the possibility of SNB sales.

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