The Swiss franc retreated from record highs on Wednesday after the Swiss National Bank unexpectedly cut interest rates to counter its rise, though concerns about global growth may lead to further gains for the safe-haven currency. The SNB said the franc was massively over-valued, keeping alive the prospect of intervention. That also sharpened the focus on Japanese authorities who warned again they were uncomfortable with the rising yen.
The yen, considered another investor bolt-hole in times of financial stress, held steady against the dollar, with investors increasingly wary of intervention. The euro rose over 1 percent against the dollar to $1.4345, helped mainly by gains against the franc and after better-than-expected eurozone retail sales. But widening peripheral bond yields were likely to cap the common currency's rise.
The euro rose more than 2 percent on the day to a session high of 1.1149 francs. It had hit a record low of 1.0794 on trading platform EBS just before the SNB's move to cut its target rate to "as close to zero as possible" was announced. The euro was on course for its biggest daily percentage gain against the franc since mid-March 2009. The dollar also rose, by around 1.8 percent, to a session high of 0.7788 francs from around 0.7630. But analysts said the SNB move was unlikely to stave off further franc gains, and any drop in the currency was probably a good time to buy it.
"These measures will at best slow the pace of appreciation in the Swiss franc, as real money is seeking the franc and it's not just speculative flows," said Neil Mellor, currency strategist at Bank of New York Mellon. The euro has lost roughly 11 percent against the franc so far this year and the dollar 17 percent. The SNB will be wary of intervention to weaken the franc, however, having spent nearly $21 billion trying the check the currency's gains between March 2009 and June 2010.
"The SNB will be reluctant to intervene in the currency markets again after their intervention at 1.50 francs which was perceived as being unsuccessful," said Adrian Schmidt, currency strategist at Lloyds Banking Group. The sharp retreat in the Swiss franc versus the euro saw implied volatilities fall. One-month implied euro/Swiss vols were trading at 16.10 percent versus 18.70 beforehand.
But risk reversals, a measure of the premium required to hold a put or a call option in a currency pair, continued to show a bearish bias towards the dollar and the euro versus the franc. The dollar was steady against the yen, with investors cautious about pushing lower given the risks of intervention. The dollar was flat at 77.13 yen, having hit a four-month low of 76.29 yen earlier this week, close to March's record low of 76.25 yen.
Attention is turning to the Bank of Japan which could ease monetary policy at a meeting later this week. One possible step may be to expand the size of the BoJ's asset-buying scheme, which stands at 10 trillion yen. Analysts said despite these measures, investors will continue to seek safe-haven currencies like the franc and the yen and sell growth-linked currencies like the Australian dollar amid debt market jitters and worries about global growth.