Swiss franc surges to new record; all eyes on Fed

NEW YORK: The Swiss franc soared on Tuesday to record highs for a third straight day against the euro and dollar as concerns about the global economic outlook and a rout in stock markets drove investors to safety.

Analysts said focus is now on Tuesday's meeting of the US Federal Reserve's policy committee, with investors likely to scour for hints about any new monetary stimulus program with fears of a new global downturn growing.

The Japanese yen, which also tends to benefit in times of market stress, breached 77 yen per dollar, above levels that triggered official intervention from Tokyo last week. The growth-sensitive Australian dollar briefly fell below parity against the US currency but recovered.

Fears of a new global downturn and the perception that global policymakers lack the tools to stop it pushed world equities down for a 10th consecutive day. The sell-off accelerated this week after the US debt rating cut.

"There are global growth concerns that are resonating throughout the markets. It's more than just what we saw in terms of the S&P downgrade," said Mary Nicola, currency strategist at BNP Paribas in New York.

The Fed is slated to make its interest-rate decision and release the accompanying statement around 2:15 p.m. (1815 GMT).

"With central bankers around the world recently carrying out various forms of intervention...one wonders what tricks are left," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

"Such are the forces in motion that any action can only be seen as being consigned to stemming powerful moves without addressing underlying problems."

The United States faces one-in-four odds of slipping back into recession, and a weaker economic outlook is raising the likelihood the Fed will soon do more to boost growth, a Reuters poll shows.

The euro dropped to its lowest on record at 1.0475 Swiss francs on trading platform EBS. It was last at 1.0528 in volatile trade, down 1.7 percent for the day.

The franc also rose to an all-time high versus the dollar on EBS of 0.73592 before easing to 0.7394, with the dollar down 2.1 percent.

FRANC AT PARITY?

The euro has fallen about 15 percent versus the franc so far this year. Analysts said the franc could reach parity with the euro, despite the Swiss National Bank's recent move to cut interest rates and warnings over the franc's strength.

"Parity looks pretty likely for euro/Swiss as long as there is heightened risk aversion," said Tom Levinson, currency strategist at ING. "The SNB has been threatening but they had a terrible time with intervention last time and the market is taking them on."

The SNB may be reluctant to intervene in currency markets after attempts to weaken the franc when the euro fell below 1.50 in the wake of the Lehman crisis left the central bank sitting with heavy losses.

One-month implied volatility in the euro/Swiss -- a measure of the market's expectations of future movements in the currency pair -- hit record levels of around 26 percent.

Against the yen, the dollar fell as low as 76.98 on EBS, not far from a record low of 76.15 yen reached in mid-March. It last traded at 77.20 yen, down 0.7 percent. Japan intervened to stem yen strength last week when the dollar/yen was trading around 77.10 yen.

Japanese Finance Minister Yoshihiko Noda repeated on several occasions that he was watching markets closely, but said that authorities would wait to see market reaction to the US Fed decision before deciding whether to act again.

The dollar briefly spiked against the yen in Asia, fueling speculation that Tokyo authorities had stepped into the market to follow up on last week's massive yen selling intervention, but there were no sightings of official action on Tuesday.

The Australian dollar earlier fell below parity against the US dollar, sliding to $0.9927, its lowest in about five months, but later recovered to $1.0165, still down 0.3 percent on the day.

The euro rose 0.6 percent to $1.4259 after European Central Bank President Jean-Claude Trichet said the ECB was actively buying government bonds. Traders said the ECB was buying Spanish and Italian bonds for the second day running.

Copyright Reuters, 2011