Franc fallout spurs demand for dollars

[EDINBURGH] The euro dropped toward an 11-year low against the dollar after the Swiss National Bank roiled financial markets by unexpectedly scrapping the franc's cap.

The shared currency headed for its biggest weekly loss versus the yen since May 2011 as a report confirmed consumer prices in the region fell in December, strengthening the case for the European Central Bank to buy government bonds. The franc fell about 4 per cent on Friday versus the dollar and euro after surging as much as 38 per cent and 41 per cent, respectively, against the currencies on Thursday. A gauge of foreign-exchange volatility climbed to the highest in more than a year.

"It's more of a negative euro story," Thu Lan Nguyen, a strategist at Commerzbank AG in Frankfurt, said of the SNB's move. "Obviously they are assuming that the ECB is going to be ultra expansionary for a very long time and they don't want to follow this monetary policy. It was a bomb they dropped there." The euro fell 0.4 per cent to US$1.1589 at 6:59 am in New York. It touched US$1.1568 on Thursday, the weakest level since November 2003. The single currency was little changed at 135.29 yen, having lost 3.6 per cent this week.

The franc dropped 3.9 per cent to 1.0146 per euro after surging to a record 85.172 centimes on Thursday. Switzerland's currency fell 4.1 per cent to 87.53 centimes per dollar.

Volatility Surges The SNB surprised markets at its policy meeting on Thursday by abandoning its three-year-old cap of 1.20 per euro on the franc. Policy makers also reduced the interest rate on sight deposits, deepening a cut announced less than a month ago.

JPMorgan Chase & Co.'s index of global currency volatility rose as high as 11.59 per cent on Thursday, the most since June 2013, up from last year's low of 5.28 per cent.

"With the Swiss central bank's policy shift, the euro slid and the franc surged, creating a spike in volatility and that's led to a risk-off trade," said Kengo Suzuki, chief currency strategist at Mizuho Securities Co in Tokyo.

The euro has tumbled 6.2 per cent in the past month, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The franc jumped 13 per cent, the yen gained 1.8 per cent and the dollar rose 2.1 per cent.

The 19-nation currency headed for a fifth weekly decline against the dollar before the region's policy makers meet on Jan 22 to discuss introducing new stimulus, including quantitative easing.

"We've had an enormous and discreet and untradeable move in currencies, which has caught a lot of investors offside," Richard Yetsenga, head of global markets research at Australia & New Zealand Banking Group Ltd, said in an interview on Bloomberg Television's "On the Move" with Rishaad Salamat.

"It does seem the euro will be much weaker than we thought." The euro will decline to US$1.15 by the end of this year, according to the median estimate of a Bloomberg News survey of more than 50 analysts.

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major peers, rose 0.2 per cent to 1,138.32 after dropping 0.3 per cent on Thursday.

BLOOMBERG