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Thursday March 12, 2009 - 20:42:56 GMT
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FOREX NEWS-Dollar, euro soar vs Swiss franc; SNB intervenes

 

Thu Mar 12, 2009 4:23pm EDT

* Dollar, euro jump vs Swiss franc after SNB intervention

* SNB to buy foreign currencies to avert deflation risks

* SNB move to benefit other European emerging markets (Recasts; updates prices)

By Nick Olivari

NEW YORK, March 12 (Reuters) - The U.S. dollar and euro jumped against the Swiss franc on Thursday after the Swiss National Bank said it was intervening in the foreign exchange market as it faced the growing risk of deflation.

The Swiss central bank said it was implementing its decision to buy foreign currencies and also cut interest rates on Thursday by a quarter percentage point to a historic low, offering three-, six- and 12-month funds at 0.05 percent.

The SNB, which last intervened in August 1995, said it will buy not only foreign currencies but also bonds. Switzerland is facing its worst recession in over three decades. For the SNB statement, click on [ID:nSNBTEXT]

Karthik Sankaran, Portfolio Manager and Principal at Covepoint Capital Advisors LLC In New York, called it a "very, very strong statement from the Swiss National Bank about what they are doing and about to do," adding:

"They are the first central bank that is actually using the purchase of foreign currency as a means of quantitative easing."

In late New York trading, the dollar rose 2.7 percent to 1.1841 francs <CHF=>, on track for its biggest one-day gain since September 2008, at current prices. It rose as high as 1.1965 francs, a three-month high, according to Reuters data.

The Swiss franc is one of the world's most traded currencies, at times prized as a safe haven for investors.

The euro climbed to 1.5313 Swiss francs, the highest since December. It last traded at 1.5300 <EURCHF=>, up 3.4 percent, the euro's best day ever against the Swiss currency.

SNB's move to near-zero rates and quantitative easing was expected, traders said, but the immediate move to intervene was a surprise.

Bank of New York-Mellon senior currency strategist Michael Woolfolk said "the way this was communicated was intended at maximizing its shock value." He said there were no hints from SNB officials ahead of time that intervention would be immediate.

"They changed their economic outlook; they not only lowered interest rates to effectively zero but also announced quantitative easing and currency intervention. This was the full monty," Woolfolk said.

POLAND, HUNGARY BENEFIT FROM SNB ACTION

Quantitative easing has been deployed by central banks in countries including Britain, where the central bank is buying assets with newly created money.

Marc Chandler, global head of forex strategy at Brown Brothers Harriman in New York, said the SNB intervention should ease pressure on Poland and Hungary, two European emerging market countries seriously hit by the global credit crisis.

These two countries had taken advantage of ultra-low Swiss interest rates, borrowing heavily in Swiss francs and investing in riskier assets.

"The strength of the Swiss franc compounded their woes. Today's dramatic weakening of the Swiss franc may ease this pressure," said Chandler.

The dollar fell 3.1 percent against the Hungarian forint on Thursday <HUF=> and 3.5 percent against the Polish zloty <PLN=>.

Gains in the dollar versus the Swiss franc boosted the greenback against other major currencies such as the euro and sterling.

The euro rose 0.8 percent to $1.2923 <EUR=>, though it had been pressured for most of the day, as the impact of the euro's rally against the Swiss franc spilled over into other pairs.

European Central Bank President Jean-Claude Trichet said euro zone interest rates could be cut further. [ID:nLC956324]

The ECB cut its benchmark rate to a record low 1.5 percent last week and economists expect it to cut to 1.0 percent, most likely in April.

Sterling rose 0.7 percent to $1.3950 <GBP=>.

The SNB news overshadowed all other events and data in the market including U.S. retail sales numbers that were better than expected and weekly jobless claims data that were not far from analysts' forecasts. [ID:nN12352975]

Against the yen, the dollar erased early losses, partly because of firmer U.S. stocks, still one of the key drivers in the currency market. Stocks were lifted by energy shares and the U.S. retail sales report. The dollar rose 0.6 percent to 97.81 <JPY=>. (Additional reporting by Steven C. Johnson and Gertrude Chavez-Dreyfuss; Editing by James Dalgleish)

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