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Swiss Franc declines to record against euro as funds seek yield

The Swiss franc declined to a record against the euro on speculation investors sold the country's currency to invest in higher-yielding assets overseas.

The franc has fallen 1% this year to the lowest since the euro's introduction in January 1999 on prospects the European Central Bank will lift interest rates faster than Swiss policy makers. Switzerland has the lowest rates among major economies outside Japan, encouraging investors to borrow in francs and buy assets abroad, known as the carry trade. The yen also fell today. „The carry theme remains very much in vogue,” said Tania Kotsos, a currency strategist at RBC Capital Markets in London. „The Swiss franc and the yen will come under further pressure as they remain funding currencies of choice.” Against the euro, the franc weakened to as far as 1.6255, an all-time low, and was unchanged at 1.6238 as of 10:59 a.m. in Zurich, according to data compiled by Bloomberg. The franc has fallen against 15 of the 16 most-traded currencies this year. The Japanese yen also slid to near a record low against the euro, dropping 0.1% to 157.84. Higher-yielding currencies including the UK pound, Turkish lira and Indonesia rupiah rose. Swiss National Bank council member Serge Gaillard yesterday said he wasn't concerned about weakness in the franc as long as „there are no inflation threats.” He was speaking from Bern. Prices rose 0.6% in December and have stayed below the central bank's 2% limit for more than a decade. The Zurich-based SNB, which last month raised its benchmark interest rate for a fifth time since December 2005, forecasts inflation will remain below 2% through the Q3 of 2009.

The central bank's 2% key interest rate compares with the Frankfurt-based ECB's 3.5% benchmark, and 5.25% in the UK and US Borrowing costs in Turkey are 17.5%, and 6.25% in Australia. The SNB's next quarterly monetary policy assessment is scheduled for March 15 in Zurich. „The carry-trade theme is ongoing with the franc and the Japanese yen weakening,” Marcus Hettinger, a currency strategist at Credit Suisse Group, said in Zurich. „The franc could hit the 1.6260 level against the euro in the very near term.” Futures traders increased their bets that the Swiss franc will slide against the US dollar, figures from the Washington-based Commodity Futures Trading Commission show. The franc traded at 1.2532 versus the dollar, from 1.2533 yesterday. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Swiss franc compared with those on a gain - so-called net shorts - was 44,081 on January 26, compared with net shorts of 42,248 a week earlier.

Carry trades have reached around $34 billion, the highest since a financial crisis in Russia in 1998, Barclays Capital said in a research note on January 26, citing calculations it made based on the CFTC figures. SNB President Jean-Pierre Roth last week said the franc's 2.5% drop in the prior six months was „short term” and the outlook for the economy and currency were „excellent.” Roth said the SNB would remain „very vigilant” on any inflationary pressures created by weakness in the franc, which increases the cost of imports for Swiss consumers. „A weak franc means high import prices,” he said in an interview on January 25 in Davos, Switzerland, at the World Economic Forum. „If a risk appears from that side, we must act.” The strength of the euro has helped increase the value of foreign sales for Swiss exporters including chocolate maker Lindt & Spruengli AG and Swatch Group. „We don't comment” on movements in the franc, Werner Abegg, a spokesman for SNB, said in Zurich today. (Bloomberg)