Euro, US dollar rise for a second day vs Swiss franc

NEW YORK: The euro and dollar further notched gains against the Swiss franc on Friday, advancing more than 7 percent the last two sessions as investors grew wary of potential Swiss National Bank action to slow the franc's rise.

The yen, meanwhile, hovered in a tight range near a record high versus the dollar, as markets remained alert for possible Japanese intervention to halt its rally.

Investors though remained transfixed on price action in the Swiss franc crosses given the size of the moves. On Thursday, the SNB said it could peg the franc to the euro, fueling a massive covering of euro and dollar shorts which saw both currencies post their best one-day gains ever.

Pablo Frei, portfolio manager and senior market analyst, at Quaesta Capital in Zurich, Switzerland said investors have become a little more cautious about driving the Swiss franc higher given the SNB's recent statements.

Quaesta Capital is a currency fund of funds with assets under management of about $3.5 billion.

"They're asking themselves whether the franc is trading at a level that would still make sense for investors to buy."

Overall, Frei said news from either the United States or Europe could drive the foreign exchange market next week, adding that currency managers tracked by Quaesta have remained generally risk-averse with short positions on the euro and Australian dollar and longs on the yen.

"Investors are hoping things will improve in both the US and Europe so they don't have to think about the Swiss franc anymore," Frei said.

In early afternoon trading, the euro rose 1.7 percent to 1.10500 francs, rebounding further from a record low of 1.0075 set on trading platform EBS on Tuesday. Despite the latest move, the euro was still down 11.5 percent this year and about 2.8 percent lower this month.

The Swiss franc has become the most overvalued currency, even more expensive than the Brazilian real, according to Goldman Sachs estimates. At one stage this week, the franc was overvalued by as much as 71 percent.

Implied volatility on euro/Swiss franc, a gauge of the market's expectations of future movements, inched up on Friday as the pair swung from negative to positive territory. One-month euro/franc implied vols traded at 23.15 percent from 22.25 percent on Thursday. These levels were way below the record of 32 percent hit on Tuesday.

DOUBTS ON CURRENCY PEG

Most market participants have expressed doubts about the viability of fixing the franc to the euro.

A peg -- essentially placing a ceiling on the franc -- could open the SNB to unlimited selling in the Swiss currency and reserve accumulation and analysts considered the move unlikely for now.

In addition, anchoring the franc on the euro, which is plagued by debt problems in peripheral economies, could risk destabilizing the Swiss unit itself.

Goldman Sachs said in a research note that while the SNB could announce a temporary peg to the euro, this is probably not necessary. A more effective way would be to use a managed float to guide the euro/franc higher in very narrow ranges.

While a full reversal of the euro/franc back to its fair value of 1.44 is rather unlikely, "a move back to 1.20 as in our forecasts could be realistic," it said.

The dollar rose 1.7 percent to 0.77580 franc, but was 17 percent lower on the year and 2.0 percent weaker in the month of August.

The dollar slipped 0.1 percent to 76.720 yen, not far from an all-time low of 76.250 set on EBS in mid-March.

Traders cited option barriers at 76.25 yen and 76.00 yen, which could cushion the dollar's fall. Some said there was strong demand for short-dated dollar call options with strike prices around 78 yen to 79 yen, in case Tokyo does intervene.

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

The euro last traded little changed at $1.42463, erasing gains as data showing US consumer sentiment worsened in early August weighed on risk appetite.

Copyright Reuters, 2011