Swiss franc heads for worst day; yen nears record

NEW YORK: The dollar and euro headed for their best days ever against the Swiss franc on Thursday after the Swiss National Bank said it could ease monetary policy further and even peg the franc to the euro to rein in a soaring currency.

The bank's Vice Chairman Thomas Jordan was quoted by the local press as saying the SNB could make monetary policy more expansive, fueling speculation Switzerland could soon impose negative interest rates.

When asked about temporarily pegging the franc to the euro, Jordan said: "Temporary measures that influence the exchange rate are part of our mandate so long as they are compatible with long-term price stability."

"While a peg would be a very strong move, I still don't think that's an immediate possibility," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

Concerns about a spreading debt crisis in Europe and uncertainty about the global economy have prompted investors to seek safety, driving the franc repeatedly to record highs against the dollar and near parity versus the euro.

"The best they can do is continue pumping in liquidity with the hope that (the franc) at least will stop appreciating. That will buy some time for the European authorities to really fix the euro zone debt crisis and that will probably reverse some of the franc strength," Serebriakov said.

The euro last traded up 4.3 percent at 1.0731 francs, compared with a record low of 1.0075 set as recently as Tuesday.

Analysts said the SNB could choose to peg euro/franc around the 1.15 level.

The dollar rose 4 percent to 0.7552 franc.

The yen hovered near a record high against the dollar as investors continued to sell riskier assets, fueling speculation that Japanese authorities may step in to stem the yen's gains.

The dollar fell as low as 76.302 yen on trading platform EBS, within striking distance of a record low of 76.25 yen set in mid-March. It was last down 0.4 percent at 76.62.

Earlier in London trading, the dollar briefly jumped above 77 yen from 76.30 yen, but soon fell back after traders said they had not seen any yen-selling intervention by Japanese authorities. A finance ministry official declined to comment.

Sharp gains in the euro versus the Swiss franc helped lift the euro zone common currency against the dollar. The euro last traded up 0.3 percent at $1.4219.

PEG TO SUCCEED?

Credit Suisse said Swiss franc Libor futures are already trading in negative territory. Spot Libors may also go negative as Swiss banks try to discourage foreign wholesale deposits, the bank added.

Negative interest rates, essentially forcing banks to charge clients to hold their money, could dissuade some investors from buying the safe-haven franc, but the effect could be limited.

"Markets are not holding Swiss francs for their return, they're holding them for insurance," Wells Fargo's Serebriakov said. "So a slight negative interest rate may not discourage too much demand for the currency."

Even a strong move to peg the franc to the euro may not succeed, analysts said.

In April 2010, the SNB tried targeting a 1.4350 francs per euro level by buying the cross on dips but ultimately failed.

"On the surface it is easy to argue that unlimited intervention selling your currency is much easier than trying to do unlimited intervention buying it," currency strategists at Citigroup wrote to clients.

"The other side of the argument is that if the concerns about the euro zone do not dissipate, investors may be very happy to make the trade, especially if they set the euro/Swiss franc peg at or above current spot."

Copyright Reuters, 2011