Dollar lower, franc within sight of SNB ceiling vs euro

[November 10, 2014]  By Patrick Graham

LONDON (Reuters) - The dollar made a poor start to the week on Monday, with investors still seeing Friday's weaker than expected U.S. jobs numbers as an excuse to pause after three strong weeks of gains.

The Swiss franc was on the verge of reaching the central bank's 1.20 franc ceiling versus the euro, edging up to its strongest in two years after another week that highlighted the euro zone’s problems.

The fundamental picture remains in favour of further gains for the dollar, with Japan again easing monetary policy and the euro zone economic picture making a strong case for similar action from the European Central Bank.

But in morning trade in Europe the dollar was 0.4 percent lower against a basket of currencies, reflecting weakening of half a percent and 0.35 percent respectively to 114.06 yen and $1.2498 per euro.

"The dollar has had a good run of late and those who have been short euro dollar for example have just taken this chance (to take stock)," said Geoffrey Yu, a strategist with UBS in London.
 

"At $1.25, there is already a good deal of quantitative easing baked in to the price of the euro, but I would also say that it is less about how much more the euro can fall than how much the U.S. policy outlook justifies further dollar gains."

Like most major banks, UBS expects the diverging fortunes of the U.S. and European economies to push the dollar consistently higher over the next year.

Preliminary euro zone growth figures for the third quarter on Friday will offer more evidence on the scale of the currency bloc's problems with delivering the growth needed to rescue it from years of debt-fuelled deflation.

The biggest new piece of data on Monday was a 0.9 percent fall in Italian industrial production in September, with Barclays analyst Fabio Fois predicting the growth numbers would confirm a slide back into recession.

"IP data are consistent with ... a recession in Q3 and it will not exit from it before Q1 next year, at best," he said after the numbers.

FRANC CAP

The Swiss National Bank has successfully kept a lid on the franc's gains for more than three years and says it has not had to intervene to reinforce it for more than two.

The bank does not flag its interventions until after the fact, but dealers said a push lower had revealed there were large, so far untaken, bids for the euro at 1.2020 francs which they expected to be from the bank.

With Swiss inflation at zero, the SNB would have a pretty free hand to create new francs to stem any more gains, and dealers and analysts maintain there is as yet little appetite in the market to test its resolve.

"Anyone who thinks they can play around with this is in for a rough time," said one London-based dealer. "There is no sign there will be any give from the SNB at all."

Volatility in the franc has been prodded higher ahead of a referendum on Nov. 30 on whether the Swiss central bank should be forced to buy more gold for its reserves.

The SNB would need to buy around 1,500 tonnes of gold at prices that have quadrupled since it began selling more than half its reserves in 2000. It could also endanger the cap on the franc by giving the bank less flexibility to buy foreign currency to defend the minimum exchange rate.

(Editing by Toby Chopra)

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