Monday, 7 November 2011

Franc Weakens to Two-Week Low Against Euro Amid Peg Speculation

The franc declined to a two-week low against the euro on speculation the Swiss National Bank will act to further limit the strength of its currency.

Switzerland’s franc fell versus all 15 major peers tracked by Bloomberg after SNB President Philipp Hildebrand said the central bank expects it to weaken further, adding to bets the bank will adjust its cap of 1.20 francs per euro set on Sept. 6. The euro slid for a second day versus the dollar and the yen as Italian Prime Minister Silvio Berlusconi faces a vote tomorrow amid pressure to resign. Losses in the 17-nation currency were limited after Greek Prime Minister George Papandreou agreed to step down to allow the creation of a national unity government.

“The franc is weighed by comments from Hildebrand and speculation that the floor may be adjusted further, although I personally don’t see that happening anytime soon,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd in London. “The euro isn’t doing well either. The Greek debt problem is far from being resolved, and now people are worried about the outlook of Italy.”

The franc fell 0.9 percent to 1.2305 per euro as of 8:15 a.m. in London from Nov. 4 in New York, after touching 1.2336, the lowest since Oct. 20. It declined 1.31 percent to 89.63 centimes versus the dollar. The euro weakened 0.5 percent to $1.3724 and lost 0.6 percent to 107.27 yen. The dollar dropped 0.1 percent to 78.12 yen.

Unless the franc depreciates, “it could lead to deflationary developments and weigh heavily on the economy,” Hildebrand said to the NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday. “We are ready to take further measures in case economic prospects and a deflationary development should require it.”


‘Further Measures’

The franc, sought in times of financial turmoil, has risen 9.8 percent versus the euro in the past 12 months, threatening Swiss exports and boosting the risk of deflation.

The euro weakened against most of its main counterparts after Berlusconi’s majority in Italy’s lower house unraveled and the nation’s yields surged toward euro-era records. Two Berlusconi allies defected to the opposition last week, and a third quit yesterday. Berlusconi said yesterday he was confident he still had a majority.

“The market’s focus is shifting to Italy,” said Yunosuke Ikeda, an analyst of foreign-exchange research at Nomura Securities Co. “Yields on Italian bonds may continue to rise unless Berlusconi resigns. The euro is likely to inch lower amid the flow of rather bad news out of Europe.”

Yields on the nation’s 10-year bond jumped to 6.46 percent, approaching the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. The rise in Italian yields pushed the spread with the German securities to 482 basis points, a euro-era record.

Italy Focus

Italy, which is due to auction treasury bills this week, sells more than 200 billion euros ($275 billion) of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is more than the borrowing of Greece, Spain, Portugal and Ireland combined.

“If Italy had the same problems that Greece had, it would not be possible to have the euro anymore,” said Luca Silipo, chief Asia-Pacific economist in Hong Kong at Natixis SA, who previously worked at Italy’s central bank. “If you have a bankruptcy of Italy, then France will be next. You don’t want Italy to have the same problem as Greece.”

Losses in the euro were limited after Greece’s Papandreou met with Antonis Samaras, the leader of the main opposition party, and “agreed to form a new government with the aim of leading the country to elections immediately after the implementation of European Council decisions on October 26,” according to an e-mailed statement from the office of President Karolos Papoulias in Athens.

Papandreou has already said he won’t lead this new government, the statement said.

“For now it removes the risk of some sort of disorderly Greek default,” Bank of New Zealand’s Burrowes said of the reports on Greece’s government.

To contact the reporters on this story: Anchalee Worrachate in London at
Candice Zachariahs in Sydney at;
To contact the editor responsible for this story: Daniel Tilles at