Markets

Dollar weak after Fed, Swiss franc falls limited

LONDON : The dollar fell on Wednesday after the US Federal Reserve said it would keep rates near zero for two years, whi

Published August 10, 2011 Updated August 10, 2011 10:18am

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By Imad Uddin

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Traders expected the Swiss National Bank's measures to boost Swiss franc supply would do little to stem exceptionally strong demand for the safe-haven currency, while confirmation of a long period of low rates would keep the dollar weak.

The franc stayed on course to scale parity against the euro and make further records against the dollar due to concerns about US and euro zone debt and worries about global growth, with the safe-haven yen also near a record high versus the dollar.

The SNB stopped short of direct intervention and the euro traded up just 0.1 percent at 1.0390 francs , leaving it vulnerable to a test of the previous day's record low around 1.0075 francs.

"The SNB is playing a dangerous game. The closer to parity euro/Swiss gets, the harder it will be to defend against more franc strength," said Peter Kinsella, currency strategist at Commerzbank.

Implied volatility jumped further in the Swiss franc, which has hit a series of record highs against a number of currencies. One-month euro/Swiss franc implied vols rose as high as 27 percent, well above the highs of around 20 percent hit after the Lehman crisis.

FED DENTS DOLLAR

The Fed's unusual commitment to keep rates low for at least two more years weakened the dollar, pushing it down 1 percent against a basket of currencies to 73.885, not far from its late July low of 73.421.

The Fed's statement sparked a rebound in riskier currencies such as the Australian dollar from recent steep falls, but concerns the US economy would stay fragile despite the pledge on rates also kept demand firm for the Swiss franc and yen.

"Search as it may, the market cannot find alternative 'safe havens' apart from Swissie and yen so they will stay bid, but you need to be cautious as there may be comments which will cause nasty spikes," said Richard Wiltshire, chief FX broker at ETX Capital.

Against the yen the dollar was down 0.5 percent at 76.67 yen, hovering close to its record low of 76.25 yen and keeping investors wary that Japanese authorities may step in again to stem gains in the Japanese currency.

The dollar edged up 0.2 percent against the Swiss franc to 0.7239 francs but it was expected that it would soon test the previous day's record low of 0.7068 francs.

The euro was up 0.2 percent against the dollar at $1.4391. The Australian dollar was steady at $1.0375, well above a low of $0.9927 hit the previous day before rebounding on the Fed's statement to spike as high as $1.0418.

"The outlook is rangebound for euro/dollar, with both currencies struggling with debt problems," said Ankita Dudani, currency strategist at RBS, adding that she expected euro/dollar to stay in a $1.40-1.45 range.

Sterling under performed, falling 0.6 percent against the dollar to $1.6207 after the Bank of England cut its growth and inflation forecasts in its latest Inflation Report.

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