The yen and the franc climbed versus all of their most-traded peers, with the Swiss currency reaching records versus the euro and dollar, as Standard & Poor’s downgrade of the U.S. credit rating and the euro-region’s debt crisis spurred investor demand for safety.
The dollar rose to a four-month high against Australia’s currency and gained versus the euro as investors sought U.S. government debt even after the rating cut as stocks plunged the most since 2008. Treasury two-year note yields dropped to a record low. Canada’s dollar dropped for a seventh day against the dollar as crude oil plummeted.
“It’s going to be hard for the yen and the Swiss to fight the tide,” said David Mann, regional head of research for the Americas at Standard Chartered in New York. “We’re not yet at the stage where there is a serious panic about debt sustainability in the U.S., so we have seen some support in the dollar, especially against the euro.”
The yen appreciated 0.8 percent to 77.77 per dollar at 5 p.m. in New York, from 78.40 on Aug. 5, and climbed 1.5 percent to 110.26 per euro, from 111.97. The franc gained 2.3 percent to 1.0705 per euro and reached a record 1.0618. It traded at 75.50 centimes per dollar, up 1.6 percent, after earlier touching a record high 74.83. The dollar strengthened 0.7 percent against the 17-nation currency to $1.4179.
Volatility in currency markets climbed to the highest level since March, with the JPMorgan Global FX Volatility Index reaching 13.19.
The Swiss currency gained 30 percent over the past year versus the currencies of nine developed-nation peers in the Bloomberg Correlation-Weighted Currency Indexes. The yen rose 0.6 percent and the dollar dropped 10 percent.
Switzerland’s government said today it agrees with the Swiss National Bank that the franc is “massively overvalued” and that energetic measures within the framework of its monetary policy are required. The government made its comments after meeting in an extraordinary session in the capital Bern with SNB President Philipp Hildebrand.
The SNB unexpectedly cut interest rates Aug. 3 and pledged to boost the supply of the franc in money markets to curb gains.
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 21 percent. That’s above the previous high reached in October 2008, one month after the collapse of Lehman Brothers Holdings Inc.
The Standard & Poor’s 500 Index tumbled 6.7 percent, the most on a closing basis since December 2008.
U.S. two-year note yields decreased as much as six basis points, or 0.06 percentage point, to an all-time low of 0.23 percent. Yields on 10-year notes touched 2.31 percent, the lowest level since January 2009.
The Federal Reserve meets tomorrow on monetary policy. It may prolong a pledge to maintain record monetary stimulus, said economists at JPMorgan Chase & Co., BNP Paribas and Goldman Sachs Group Inc. The central bank could do so by making a commitment to hold its $2.87 trillion balance sheet steady for an “extended period.”
Moody’s Investors Service reiterated that it affirmed the U.S.’s top Aaa ranking because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries, Moody’s analyst Steven Hess wrote in a report.
S&P expects the dollar, “for lack of alternative if no other reason,” to retain its reserve-currency role, John Chambers, chairman of the company’s sovereign-debt committee, said in an conference call today. Even so, the U.S. is unlikely to regain its AAA rating quickly, David Beers, managing director of S&P’s sovereign ratings group, and Chambers said in the call.
The outlook on the U.S. rating remains “negative” and 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” increase debt, the New York-based company said on Aug. 5 as it announced the downgrade.
Fitch Ratings and Moody’s 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 and ordered budget cuts. The companies said downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens.
“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, New York-based head of Americas G-10 currency strategy in at Bank of America Corp.
Obama, breaking his silence on the downgrade, said at the White House the main obstacle facing the U.S. is the “lack of political will in Washington” to solve the nation’s problems.
The loonie, as Canada’s dollar is sometimes known, weakened as crude oil for September delivery plunged to as low as $80.17 a barrel in New York, the least since November, from $94.89 a week ago.
The Canadian currency depreciated 1.3 percent to 99.45 cents per U.S. dollar, the weakest level since March 17, compared with 98.20 cents on Aug. 5.
The Australian dollar tumbled 2.4 percent to $1.0187 and touched $1.0181, the lowest level since March 24. It fell for an eighth day in the longest slump since 2001. The Aussie dropped 3.2 percent to 79.225 yen and touched 78.99 yen, the weakest since March 18.
ECB Bond Buying
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 who asked not to be identified because the deals are confidential. A spokesman for the ECB declined to comment.
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.
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.
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. Japanese Finance Minister Yoshihiko Noda said last week’s action was unilateral.