Swissie loses safe-haven premium

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Japan’s yen and the Swiss franc, both low yielding currencies, took diverging paths on Wednesday in spite of suggestions of renewed interest in carry trades.

The Swissie fell to a six-and-a-half-month low against the euro, wiping out the safe-haven premium it had built up in the previous session in the wake of foiled attacks on the US embassy in the Syrian capital Damascus.

The decline followed comments made by Philipp Hildebrand, a member of the board of the Swiss National Bank, who said on Tuesday that growth was due to slow in 2007.

Even if the SNB raises its target rate for the three-month Swiss-franc Libor by 25 basis points to 1.75 per cent today, as widely expected, Swiss rates remain among the lowest in the developed economies.

“The search for carry is keeping the Swiss franc on the back foot,” said Tania Kotsos at RBC Capital Markets, adding that the triggering of stop losses pushed the euro as high as SFr1.5912.

By midday in New York, the Swissie had recovered a little poise, standing at SFr1.5875, down 0.1 per cent. The dollar climbed 0.2 per cent to SFr1.2482.

The yen, a fellow low yielding currency, bounced however, gaining on the euro – against which it has recently plumbed record lows.

The Japanese currency also held ground versus the dollar, gaining support ahead of the weekend’s G7 meeting, where further pressure is expected to be exerted on China to allow its currency to appreciate.

The yen is often used as a proxy trade in bouts of speculation over whether the Chinese renminbi’s tightly-controlled trading band will be widened.

Hank Paulson, US Treasury Secretary, said that China needed to act swiftly in adopting a more market-based economy to stop it “veering out of control”, adding that overtly rigid exchange rates increased the risk of harmful “boom-bust” cycles.

This was countered by comments from Dai Xianglong, former Chinese central bank governor, that authorities should not rush into widening the currency’s band for fear of rapid growth in foreign exchange reserves. This, he claimed, would create problems for the central bank in managing its monetary policy.

Support for the yen was also found closer to home after Atsushi Mizuno, a Bank of Japan board member, said the central bank remained committed to gradually raising interest rates.

“This poses a question to the increasingly dovish market sentiment toward the Japanese economy and the future course of monetary policy,” said Masafumi Yamamoto at Citigroup.

The yen climbed 0.2 per cent against the euro to Y149.22, while adding 0.4 per cent against the dollar to Y117.41.

A seven-day decline in oil prices ended, but the falls have taken their toll on some of the commodity currencies in recent sessions.

The Canadian dollar has retraced 1.7 per cent since the start of the month. Other factors have contributed – the central bank has held overnight rates at 4.25 per cent since May as growth has slowed and unemployment risen – but until the recent retreat in commodity prices, the currency had remained on the up.

“A sustained and substantial correction in commodity prices would be significant for the Canadian currency. Most of Canada’s impressive trade performance is due to energy,” said Nick Bennenbroek, senior currency strategist at Brown Brothers Harriman. “A large drop in the headline trade surplus would remove another supportive factor for the Canadian dollar.”

Canada’s dollar fell 0.3 per cent against its US counterpart to C$1.1227. In Norway, also a big oil producer, the krone fell 0.8 per cent against the dollar to NKr6.6136 and 0.3 per cent against the euro to an 18-month low of NKr8.3845.

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