Euro slips on debt concerns, Swiss franc choppy

LONDON: The euro fell on Friday, dragged down by persistent worries about core euro zone debt and as a short selling ban by four European countries failed to lift investor confidence in the region's banking sector.

The safe-haven Swiss franc was choppy, after posting record one-day falls against the euro and dollar on Thursday when rebounding stock markets and verbal interventions by the Swiss central bank weighed on the currency. Traders remained edgy on Friday on growing expectations that the Swiss National Bank (SNB) could step up its fight to curb the franc's strength.

Investors were also wary of pushing the yen much higher, given expectations that Japanese authorities could intervene to check the currency's gains.

"There is no end in sight to the euro zone debt crisis and the US slowdown, both of which are negative for risk and should support the Swiss franc," said Gavin Friend, currency analyst at nabCapital.

"But there is something brewing on the Swiss side of things and if the SNB can manage to crimp demand for Swiss francs by pushing down yields and instigate even more negative yields, then we could see the euro rebounding fast to 1.15 francs."

European shares were volatile on Friday as a short-selling ban on financial shares by France, Italy, Spain and Belgium, announced late on Thursday, failed to shore up the sector. In the past few sessions, the euro has been hurt by falling stocks and as investors stepped up selling in shares of large French banks on worries about their exposure to peripheral euro zone debt.

The euro was down 0.3 percent against the dollar at $1.4198, but firm against the Swiss franc at 1.0844 francs, having fallen to a session low of 1.06853 earlier. Euro/Swiss, which hit a record low of 1.0075 on Tuesday, has lost more than 13 percent since the start of the year.

Much of the previous day's slide in the Swiss franc was sparked by a Swiss newspaper report, which quoted SNB Vice Chairman Thomas Jordan as saying the central bank could ease monetary policy further. He also declined to rule out the possibility of pegging the franc to the euro.

There was scepticism about the idea of pegging the franc to the euro, and analysts said the franc was likely to stay supported as long as worries about a global slowdown and debt problems in the United States and euro zone persisted.

"If they were to introduce a peg, there would rightly be some questions as to their commitment to defending it, because it wouldn't be a structural decision to align their economy with Europe," said Todd Elmer, currency strategist at Citi in Singapore.

"You run the risk of the SNB facing a lot of pressure from the market, which means they might have to sell a quite large amount of Swiss (francs) to defend it and it's not clear that there is the appetite among Swiss authorities to do so," he added.

The dollar was up 0.7 percent against the franc at 0.7677, off a record low of 0.70676 struck on Tuesday.

TALK OF OPTION BARRIERS

The yen was pinned near a record high against the dollar despite recent intervention by Japan to weaken it.

The dollar was down 0.3 percent against the yen at 76.61 yen, near an all-time low of 76.25 yen set in mid-March.

There has been talk of option barriers at 76.25 yen and 76.00 yen. That suggests that dollar buying by options players could emerge near such levels and cushion the dollar's fall, but it also means the dollar's drop could gain steam if such barriers are breached.

Given dollars recent drop close to its record low against the yen, jitters and speculation about the potential for Japanese yen-selling intervention have been high.

In a sign of such market sentiment, traders have cited heightened demand recently for short-dated dollar call options with strike prices roughly around 78 yen to 79 yen.

Japanese Finance Minister Yoshihiko Noda said on Friday he will consider various options if one-sided moves in the yen continue.

Commodity-linked currencies like the Australian and New Zealand dollars stayed under pressure with investors wary of adding positions given worries about global growth. The Aussie was down 0.6 percent at $1.00284 while the New Zealand dollar shed 1.1 percent to trade at $0.8218.

Copyright Reuters, 2010