Switzerland’s franc strengthened against the dollar and the euro, reversing earlier declines, on concern the global economy will stall and European banks lack sufficient capital to fund themselves.
The franc rose against all but two of 16 major peers tracked by Bloomberg after Lars Frisell, chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze. The currency also gained after U.S. reports showed applications for jobless benefits rose more than forecast and manufacturing in the Philadelphia region contracted. European stocks plunged the most in more than two years.
“The market is very risk averse and demand for the franc is going to continue, despite the best efforts of the SNB to discourage it,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s going to be difficult for the Swiss National Bank to combat fundamental flows against the backdrop of the debt crisis and slowing global economy.”
Switzerland’s currency appreciated 0.1 percent to 79.07 centimes per dollar at 4:49 p.m. in London and strengthened 0.7 percent to 1.1317 per euro, after earlier falling as much as 1.3 percent.
The franc has risen 13 percent this year, making it the best performer among a basket of 10 developed-market currencies, according to Bloomberg Correlation-Weighted Currency Indexes.
The franc weakened earlier as traders bet the central bank will take further steps to curb its appreciation.
Finance Minister Eveline Widmer-Schlumpf said yesterday she is “concerned” about the franc’s strength and that the government supports all SNB measures to weaken it.
The central bank said yesterday it will raise banks’ sight deposits, or money that can be accessed immediately, to 200 billion francs from 120 billion francs, continue to repurchase outstanding SNB bills and use foreign-exchange swap transactions in an effort to curb the currency’s appreciation.
Still, the franc gained yesterday as investors bet the measures to curb the currency’s gains would be insufficient.
“The SNB will have to come up with some major steps fairly soon,” said Jane Foley, a senior currency strategist at Rabobank International in London. “It can’t go on making an empty threat or the market will lose its patience and start piling into the franc again.”
The rate to exchange fixed- for floating-interest rate payments denominated in francs turned negative for the first time yesterday as the SNB appeared to have lost ground in its fight to halt a surge in the currency. The rate fell to minus seven basis points today from minus three basis points yesterday.
“People still are buying Swiss securities out of fear and wealth-preservation anxiety,” said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading. “Even with the decline in rates, investors continue to purchase Swiss assets as well as gold.”
Swiss bonds rose, pushing 10-year yields down 21 basis points to 0.85 percent, the lowest level since Bloomberg began collecting data in 1994. That’s also the biggest one-day drop in 10-year Swiss bond yields on record. The yield on two-year notes was negative for a second day, trading at minus five basis points.