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Swiss Central Bank Acts to Halt Franc’s Rise

September 6, 2011 by Leave a Comment

The Swiss currency, long considered a safe haven, has surged against the euro and the dollar this year as investors flee turmoil in the markets. That has raised fears among Swiss businesses that the country’s exporters will be priced out of major markets. Switzerland’s biggest trading partner is the European Union.

“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” the Swiss National Bank said in a statement
. It said it “is therefore aiming for a substantial and sustained weakening of the Swiss franc.”

The central bank “will no longer tolerate” a euro-franc rate below a floor of 1.20 francs, it said, and “will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”

The franc fell sharply, with the euro rallying to 1.20 Swiss francs from 1.11 francs late Monday. The dollar soared to 0.8483 Swiss franc from 0.7872 franc.

The euro has traded as low as 1.03 francs this summer.

The central bank’s new target commits it to buying euros and selling francs any time the euro falls below 1.20 francs. That amounts to the setting of a “floor” for the euro.

The authorities had also considered implementing a currency “peg,” in which the franc would be defended at a specific rate. In reality, considering the downward pressure on the euro, the 1.2 franc level will probably prove a de facto peg for the time being.

Currency market intervention, when it is not coordinated among the major central banks, has failed to have a lasting effect in recent years, as the Bank of Japan has learned to its chagrin.

Steven Saywell, head of global currency strategy at BNP Paribas in London, said he thought it “very unlikely” that the Swiss National Bank’s counterparts at the Federal Reserve and European Central Bank would be eager to follow suit, even though a Friday-Saturday meeting of Group of 7 finance and central bank officials in Marseilles would give them an opportunity to coordinate policy.

“The G-7 has far greater issues to deal with,” Mr. Saywell said, “like preventing the U.S. economy from sliding into recession and supporting the ongoing political discussions about addressing Europe’s debt problems.”

Indeed, the E.C.B. appeared to distance itself from the S.N.B. decision, saying in a two-sentence statement that the Swiss central bank had made the decision to hold down the value of the franc “under its own responsibility.”

Mr. Saywell said investors were certain to test Switzerland’s resolve, as the authorities there were attempting to buck a strong tide.

“In an environment of strong growth and economic stability, the franc might weaken,” he said. “But in this climate, we expect the market to challenge the S.N.B. over the next few days.”

The move is but the latest by the central bank in seeking to check the rise in the franc. Last month, it said that it would significantly increase the supply of liquidity to the Swiss franc money market. It increased banks’ sight deposits, a liquidity facility through which banks can withdraw money, to 120 billion francs from 80 billion francs. It also said it would conduct foreign exchange swap transactions to create liquidity in Swiss francs.

Even at a rate of 1.20 francs per euro, the central bank said Tuesday, “the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the S.N.B. will take further measures.”

The central bank’s action “is a bold move, but that level is still relatively high, implying that the economy will suffer nonetheless,” Jennifer McKeown, an economist with Capital Economics in London, wrote in a research note. “It sounds like, rather than using foreign exchange swaps to flood the market with francs as it has in the recent past, the bank plans to revert to its earlier strategy of intervening directly in currency markets.”

Ms. McKeown noted that the euro had averaged about closer to 1.7 francs over the long run, so “we suspect that Swiss exports will drop anyway, given the still relatively high level of the franc.”

Article source: http://feeds.nytimes.com/click.phdo?i=5bd8fa129636d4b06914e97b2243f7ce

Filed Under: Business News Tagged With: , ,

Some See Rise Ahead for Dollar

May 18, 2011 by Leave a Comment

For the better part of the past decade, and particularly in the last few months, the American dollar has been the 98-pound weakling of the foreign exchange world. It has lost value against almost every other global currency — not just the euro, pound and yen but even the Romanian new leu and the Latvian lats.

Driven largely by the Federal Reserve’s policy of printing dollars to help spur a healthy economic recovery that remains stubbornly elusive, the dollar, weighed against a basket of other currencies, hit a 40-year low this month.

But betting against the dollar may no longer be such a safe play — not necessarily because of any sudden macroeconomic shifts but because of a sense that the long dollar sell-off may have finally gone too far.

Since May 4, the dollar is up 4 percent against the euro and 2 percent against the pound, while rallying against the Romanian and Latvian currencies as well.

 The dollar’s bounce, though too brief to be called a trend, has not been driven by any noticeable improvement in America’s economic fundamentals. Indeed, the faint but real risk that Congress will fail to reach agreement on raising the legal ceiling on government borrowing only underscores the still parlous state of the American economy.

At the same time, unemployment in the United States remains stubbornly high, at 9 percent. And there is a strong belief among big money investors that the Obama administration as well as the Federal Reserve chairman, Ben S. Bernanke, tacitly welcome a cheaper dollar to spur exports and encourage American manufacturers to hire more aggressively.

“The U.S. economy is still facing headwinds — from weak housing to reductions in government spending,” said Ray Attrill, a currency strategist for BNP Paribas in New York. “For those reasons, we think the export sector is where policy makers are looking for growth.”

But analysts also see another, more technical reason behind the dollar’s long decline — one that may well be ending. Ever since the global financial crisis began to ease in 2009, the appeal of investing in higher-yielding currencies and commodities all over the world has created what, in trader parlance, is called a risk-on, risk-off dynamic.

Investors tend to sell their safer holdings, like United States Treasury bonds, when they feel more bullish. Because 90 percent of the world’s hedge funds are dollar-based, those changes in sentiment can have a depressing effect on the American currency. Reserve-rich central banks in emerging markets have also been selling dollars and buying euros to rebalance their reserve portfolios, said Mr. Attrill, citing recent data from the International Monetary Fund.

“Everything has been strengthening against the dollar — this is something that has not happened in the past,” said Stephen L. Jen, an independent currency strategist and former economist for the International Monetary Fund.

But that momentum now appears to have swung too far to one side — particularly as Europe’s own debt problems return to the limelight. Mr. Jen sees the euro’s rise to a high of $1.49 from $1.19 over the last year as overdone,  especially in light of the festering problems in Greece and other weak euro zone economies. Even now, the euro is back down to $1.42.

“With its sovereign debt issue and the growth differential in the euro zone,” Mr. Jen said, the euro is “just too expensive.”

Other analysts also have begun to say enough already.

In part, that is because much of the dollar’s recent weakness was driven by the perception that the European Central Bank, and to a lesser extent the Bank of England, were more likely to raise interest rates to keep inflation under control than was the Federal Reserve, which remains committed to keeping short-term interest rates near zero. With rates likely to be higher in Europe than in the United States, traders moved their money out of United States government bills and bonds to gain greater returns abroad.

But the stronger the euro got, the more likely is became that its rise would begin to bite back. As the euro rose to nearly $1.50, the strength of the currency started to raise doubts about whether the mighty German export machine, which gained competitive strength when the euro was weaker, could continue to perform so successfully around the world.

Article source: http://www.nytimes.com/2011/05/18/business/global/18dollar.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Battered Dollar’s Decline May Be Starting to Reverse

May 17, 2011 by Leave a Comment

For the better part of the past decade, and particularly in the past few months, the U.S. dollar has been the weakling of the foreign exchange world. It lost value not just against almost every other global currency, including the euro, pound and yen, but even against the Romanian new leu and the Latvian lats.

Fueled largely by the Federal Reserve’s policy of printing dollars to help spur a healthy economic recovery that remains stubbornly elusive, the dollar earlier this month fell close to a 40-year low against a basket of other currencies.

Now, however, betting against the dollar may no longer be such a safe strategy — not necessarily because of any sudden macroeconomic shifts but because of a sense that the dollar sell-off may have finally gone too far. Since May 4, the U.S. currency has risen 4 percent against the euro and 2 percent against the pound, and has rallied against the Romanian and Latvian currencies as well.

The dollar’s bounce, while too brief to constitute a trend, has not been driven by any noticeable improvement in the economic fundamentals of the United States. Indeed, the faint but nonetheless real risk that Congress will fail to reach agreement on raising the legal ceiling on U.S. government borrowing only underscores the still parlous state of the U.S. economy.

At the same time, U.S. unemployment remains stubbornly high, at 9 percent, and there is a strong belief among big money investors that the Obama administration, as well as the Federal Reserve chairman, Ben S. Bernanke, tacitly welcome a cheaper dollar to spur exports and encourage U.S. manufacturers to hire more aggressively.

“The U.S. economy is still facing headwinds — from weak housing to reductions in government spending,” said Ray Attrill, a currency strategist for BNP Paribas in New York. “For those reasons we think the export sector is where policy makers are looking for growth.”

But analysts also see another, more technical reason behind the dollar’s decline — a decline that may well be ending. Ever since the global financial crisis began to ease in 2009, the appeal of investing in higher-yielding currencies and commodities all over the world has created what, in trader parlance, is called a risk-on, risk-off dynamic.

Investors tend to sell their safer holdings, like Treasury bonds, when they feel more bullish. Since 90 percent of the world’s hedge funds are based in dollars, those changes in sentiment can have a depressing effect on the U.S. currency. Reserve-rich central banks in emerging markets have also been selling dollars and buying euros to rebalance their reserve portfolios, said Mr. Attrill, citing recent data from the International Monetary Fund.

“Everything has been strengthening against the dollar — this is something that has not happened in the past,” said Stephen L. Jen, an independent currency strategist and former economist for the International Monetary Fund.

But that momentum now appears to have swung too far to one side — particularly as Europe’s own debt problems return to the limelight. Mr. Jen sees the rise of the euro, from $1.19 to a high of $1.49 over the past year, as overdone, especially amid festering problems in Greece and other weak euro zone economies. The euro is already back down to $1.42.

“With its sovereign debt issue and the growth differential in the euro zone,” Mr. Jen said, the euro is “just too expensive.” Other analysts have begun to say enough already, too.

In part, that is because much of the recent weakness in the dollar was driven by the perception that the European Central Bank, and to a lesser extent, the Bank of England, were more likely to raise interest rates to keep inflation under control than was the Federal Reserve, which remains committed to keeping short-term interest rates near zero. With rates likely to be higher in Europe than in the United States, traders moved their money out of U.S. government bills and bonds to gain greater returns abroad.

But the stronger the euro got, the more likely it became that its rise would begin to bite. As the euro rose to nearly $1.50, the strength of the currency started to raise doubts about whether the mighty German export machine, which gained competitive strength when the euro was weaker, could continue to perform so successfully around the world.

Article source: http://feeds.nytimes.com/click.phdo?i=cf56282afb7da54eeafc3fbfad23e561

Filed Under: Business News Tagged With: , ,