Franc Drops Most in Three Days Versus Euro Since 1999; Yen Falls

Swiss Franc Slides Amid Speculation of Target-Setting
A teller handles Swiss franc coins at a till in this arranged photograph in Zurich, Switzerland. Photographer: Gianluca Colla/Bloomberg

The Swiss franc tumbled against the euro, dropping the most over the past three days since the European currency’s 1999 debut, on speculation Switzerland will take further action to counter recent gains.

The franc slid for a fourth day versus the dollar after the SonntagsZeitung newspaper said the Swiss government and central bank are in “intense” talks over setting a target for their currency. The yen dropped the most in a week against the euro after Japan indicated it’s ready to intervene in foreign-exchange markets again. Sweden’s krona advanced against a majority of its 16 most-traded peers.

“Given the strength of the franc, they’re trying to think of everything and everything,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “It’s tough to say this point if whatever actions they take can reverse the safe-haven flows.”

The franc tumbled 2.2 percent to 1.1329 per euro at 5 p.m. in New York, from 1.1086 on Aug. 12, after rallying to a record 1.0075 on Aug. 9. The Swiss currency gained 10 percent over the past three days, the biggest drop on a closing basis since January 1999. The franc fell 0.8 percent to 78.42 centimes per dollar after advancing to a record 70.71 centimes on Aug. 9.

The krona rose 1.6 percent against the dollar to 6.4067 even as Sweden’s industrial projection fell. It advanced 0.3 percent to 9.2545 per euro.

Swedish industrial production fell more than forecast in June, dropping 3.3 percent after rising a revised 2.1 percent in May, Stockholm-based Statistics Sweden said. The median estimate in a Bloomberg News survey was for a 0.9 percent decline.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 1 percent to 73.869, from 74.607.

U.S. Treasuries dropped after a three-week rally as stocks gained. Benchmark 10-year note yields rose to 2.31 percent after touching a record low 2.03 percent on Aug. 9. The Standard & Poor’s 500 Index climbed 2.2 percent.

“We’re now recovering risk appetite,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London. “The market knows it’s going to be negatively surprised, but it couldn’t care less at this point in time.”

Bets Reduced

Foreign-exchange traders reduced bets against the dollar in the week ended Aug. 9 by the most on record as demand for Treasuries soared amid global growth concerns. Aggregate bets the greenback will weaken against the euro, the yen, the Australian, Canadian and New Zealand dollars, pound, franc and Mexican peso plunged by 154,105 contracts to 153,216, the biggest drop ever in Commodity Futures Trading Commission data compiled by Bloomberg beginning in November 2003.

In June, global demand for U.S. stocks, bonds and other financial assets weakened as the White House and Congress wrangled over raising the debt limit, government figures show. Net buying of long-term equities, notes and bonds totaled $3.7 billion, compared with net buying of $24.2 billion in May, according to Treasury Department data issued today.

The yen weakened 1.5 percent today to 110.97 per euro and fell as much as 1.6 percent in the biggest intraday drop since Aug. 4. It slipped 0.2 percent to 76.83 per dollar after climbing to 76.31 Aug. 11, approaching its post-World War II record of 76.25 set in March. The 17-nation euro rose 1.4 percent to $1.4445 and touched $1.4477, the strongest level since July 27.

Franc Overvalued

The franc surged 11 percent in the past three months and the yen added 2.7 percent, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen and franc have gained as debt crises in Europe and the U.S. boosted demand for safety.

The Swiss currency is 41 percent overvalued against the euro, according to an index developed by the Organization for Economic Cooperation and Development that uses relative costs of goods and services. It’s also the most overvalued currency against the dollar, at 48 percent.

Switzerland’s central bank may set a target for the currency in “coming days,” SonntagsZeitung reported. Talks are focusing on the role of the government and an “appropriate plan” may be adopted Aug. 17, the newspaper said.

Swiss National Bank policy makers, led by Philipp Hildebrand, have been seeking ways to stop the franc’s ascent to almost parity with the euro.

‘Target Zone’

“My guess is people are looking for something between 1.10 and 1.15 as a sort of target zone for this arrangement, whatever that may be, but really we’re in the dark here,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank in Toronto. “Apart from the press reports, we don’t really know what could happen.”

The yen has risen beyond the level that prompted the Bank of Japan to sell the currency on Aug. 4, its first intervention in foreign-exchange markets since March. A stronger yen reduces the value of overseas income at Japanese companies.

“I will continue to closely watch the markets and take bold action if it becomes necessary,” Finance Minister Yoshihiko Noda said yesterday during a television talk show on the public broadcaster NHK.

Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third quarter of contraction, government data showed today.

The euro rose for a third day versus the dollar on speculation a meeting tomorrow between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Paris may result in action to contain the region’s debt crisis.

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