The US dollar and euro jumped against the Swiss franc on Thursday after the Swiss National Bank said it was intervening in the foreign exchange market as it faced the growing risk of deflation. The Swiss central bank said it was implementing its decision to buy foreign currencies and also cut interest rates on Thursday by a quarter percentage point to a historic low, offering three-, six- and 12-month funds at 0.05 percent.
The SNB, which last intervened in August 1995, said it will buy not only foreign currencies but also bonds. Switzerland is facing its worst recession in over three decades. In late New York trading, the dollar rose 2.7 percent to 1.1841 francs, on track for its biggest one-day gain since September 2008, at current prices. It rose as high as 1.1965 francs, a three-month high, according to Reuters data. The Swiss franc is one of the worlds most traded currencies, at times prized as a safe haven for investors.
The euro climbed to 1.5313 Swiss francs, the highest since December. It last traded at 1.5300, up 3.4 percent, the euros best day ever against the Swiss currency. SNBs move to near-zero rates and quantitative easing was expected, traders said, but the immediate move to intervene was a surprise.
Bank of New York-Mellon senior currency strategist Michael Woolfolk said "the way this was communicated was intended at maximising its shock value." He said there were no hints from SNB officials ahead of time that intervention would be immediate.
Marc Chandler, global head of forex strategy at Brown Brothers Harriman in New York, said the SNB intervention should ease pressure on Poland and Hungary, two European emerging market countries seriously hit by the global credit crisis.
These two countries had taken advantage of ultra-low Swiss interest rates, borrowing heavily in Swiss francs and investing in riskier assets. "The strength of the Swiss franc compounded their woes. Todays dramatic weakening of the Swiss franc may ease this pressure," said Chandler. The dollar fell 3.1 percent against the Hungarian forint on Thursday and 3.5 percent against the Polish zloty.
Gains in the dollar versus the Swiss franc boosted the greenback against other major currencies such as the euro and sterling. The euro rose 0.8 percent to $1.2923, though it had been pressured for most of the day, as the impact of the euros rally against the Swiss franc spilled over into other pairs. European Central Bank President Jean-Claude Trichet said euro zone interest rates could be cut further. The ECB cut its benchmark rate to a record low 1.5 percent last week and economists expect it to cut to 1.0 percent, most likely in April.
Sterling rose 0.7 percent to $1.3950. The SNB news overshadowed all other events and data in the market including US retail sales numbers that were better than expected and weekly jobless claims data that were not far from analysts forecasts. Against the yen, the dollar erased early losses, partly because of firmer US stocks, still one of the key drivers in the currency market. Stocks were lifted by energy shares and the US retail sales report. The dollar rose 0.6 percent to 97.81.
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