– Dollar Falls on Fed’s Pledge to Maintain Key Interest Rate at a Record Low (Bloomberg, Aug 9, 2011):
The dollar tumbled the most in at least 40 years against the Swiss franc after the Federal Reserve pledged to keep its key interest rate at a record low at least through mid-2013 to revive the flagging economic recovery.
The greenback declined versus the majority of its most- traded peers as the Fed said growth was “considerably slower” than it expected and it’s prepared to use a range of policy tools to boost the economy. The meeting came a day after economic weakening and a Standard & Poor’s U.S. credit-rating cut spurred a global stock rout. Commodity currencies recouped losses sustained just after the meeting. Stocks and gold surged.
“With the Fed saying they have tools available that they are willing to use and giving a more definitive time frame, that is overall going to be a dollar negative,” said John Doyle, a strategist in Washington at the currency-trading firm Tempus Consulting Inc. “Swiss franc and gold have absolutely been the beneficiaries of uncertainty.”
The dollar fell 4.5 percent to 72.09 Swiss centimes at 5 p.m. in New York, from 75.50 yesterday. It dropped as much as 6.3 percent, the most since the beginning of Bloomberg records in January 1971, touching a record low 70.71 centimes. The euro dropped 3.2 percent to 1.0364 after touching the record low 1.0075. The U.S. currency depreciated 1.4 percent to $1.4376 per euro and fell 1 percent to 76.96 yen.
“The Swiss franc is a falling knife, and no one wants to catch it,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “It will take a policy action to stop and reverse the uptrend in the Swiss.”
Australia’s dollar rose 1.7 percent to $1.0355 per greenback after earlier dropping to $1.0064 U.S. cents just after the Fed meeting, while the New Zealand currency climbed 2 percent to 83.74 U.S. cents after depreciating to 80.72 cents after the meeting.
U.S. stocks rallied the most in more than two years. The S&P 500 Index (SPX) climbed 4.7 percent, the biggest advance since March 2009, after falling briefly as much as 1.6 percent following the Fed meeting. It tumbled 6.7 percent yesterday in its biggest drop since December 2008.
Gold for December delivery reached a record $1,782.50 an ounce today.
The greenback rose yesterday against the majority of its most-traded peers as investors sought safety on the first day of trading after S&P lowered the U.S. credit rating Aug. 5 to AA+ from AAA.
The Federal Open Market Committee’s decision represents the biggest effort since November to spark the U.S. economy and revive confidence while stopping short of initiating a third round of large-scale asset purchases. The benchmark interest rate has been at zero to 0.25 percent since December 2008 to support the economy.
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, increased 0.3 percent on June 22 to 74.783 after falling 0.7 percent the previous day. It dropped 1.2 percent today to 73.902.
“The dollar obviously has tested record lows against the Swiss franc today; I think you have to think the dollar’s going to continue to test the downside,” Robert Sinche, global head of currency strategy at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in an interview on Bloomberg Television’s “Bottom Line” with Mark Crumpton. “Certainly guaranteeing no dollar support of rate increases through the middle of 2013, two years from now, I think is a pretty aggressive position.”
Swiss National Bank
The Swiss franc’s gains came even after the Swiss National Bank on Aug. 3 lowered its target for the three-month London interbank offered rate to weaken the currency and protect Switzerland’s economy.
Implied volatility, a key gauge of option prices that tends to rise in times of uncertainty, for euro-Swiss franc one-month options climbed to 30 percent for the first time. The equivalent dollar-franc volatility rate reached 23.9 percent, the most since January 2009.
Sterling declined against most of its 16 major peers tracked by Bloomberg. U.K. factory output decreased 0.4 percent in June from the previous month, when it rose 1.8 percent, the Office for National Statistics said today in London. Civil unrest that began in north London Aug. 6 spread to other parts of the capital and other cities.
The pound fell 1.4 percent to 88.11 pence per euro.
Canada’s currency rose 1.8 percent to at 97.72 cents per U.S. dollar in its first gain in eight days.
The Japanese currency has erased its decline since the nation’s unilateral intervention in the foreign-exchange market pushed it to as weak as 80.24 per dollar on Aug. 4. That day, the Bank of Japan added 10 trillion yen ($129 billion) of monetary stimulus. BOJ Governor Masaaki Hirakata today said volatile exchange rates could have a “negative impact” on the nation’s economy.
Central banks intervene in foreign-exchange markets by selling or buying currencies to influence prices.