The Swiss franc strengthened to a record against the dollar as concern that policy makers are failing to stem the European debt crisis, coupled with a U.S. credit-rating downgrade, boosted demand for the safest assets.
The franc extended its year-to-date gains versus all of its 16 major peers tracked by Bloomberg. It stayed higher against the euro even as the European Central Bank was said to buy Italian and Spanish government bonds to tame surging borrowing costs. The Swiss cabinet planned to discuss the strength of the currency during an extraordinary session today after the Swiss National Bank last week cut interest rates in an attempt to curb its advance.
“The Swiss franc is the gauge of how nervous the market is,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. On today’s ECB buying, “we all know that doesn’t solve the European debt crisis. It’s just buying time and it remains the case that the politicians haven’t convinced the market.”
The franc advanced 1.3 percent to 75.73 centimes per dollar as of 4:33 p.m. in London, after appreciating to a record 74.85 centimes. It strengthened 1.8 percent to 1.0759 per euro.
The Swiss government was meeting today amid concern the strength of the franc may hamper economic growth and cramp exports, which account for more than half the economy. Switzerland’s central bank unexpectedly cut rates on Aug. 3 to fight currency gains that have seen the franc surge 19 percent against a basket of nine developed-market peers this year, according to Bloomberg Correlation-Weighted Currency Indexes.
Central Bank Measures
The SNB “knew last week that they were swimming against the tide, and unfortunately that still remains the case,” said Foley. “The next few weeks and months are going to be crucial for the euro and throughout that period most investors aren’t going to want to dump their Swiss positions.”
The ECB today bought Italian and Spanish government bonds, according to people with knowledge of the transactions. It also bought Irish and Portuguese bonds, said two of the people, who asked not to be identified because the deals are confidential. A press officer for the ECB declined to comment.
Italian 10-year yields dropped 81 basis points to 5.28 percent, while the yield on Spanish debt of a similar maturity slid 88 basis points to 5.18 percent.
Trusting the ECB
The debt purchases are unlikely to encourage investors to sell the franc, or alternative haven currency, the Japanese yen, according to Ray Farris, chief strategist for Asia-Pacific fixed income and global head of foreign-exchange strategy at Credit Suisse Group AG in Singapore.
“Both may drop initially in response to new ECB intervention,” he wrote in an e-mailed report today. “But we fear that it will take some time for the market and particularly the Japanese and the Swiss themselves to trust European policy action sufficiently to give up wanting the Swiss franc and yen as insurance policies against policy fatigue or mistakes.”
Swiss unemployment remained at the lowest in 2 1/2 years in July as companies boosted their workforce to meet global export demand. The jobless rate held at 3 percent when adjusted for seasonal swings from June, the State Secretariat for Economic Affairs in Bern said in an e-mailed statement today. That’s the lowest since January 2009 and in line with the median forecast of 11 economists in a Bloomberg News survey.