Swiss Franc Gains on Speculation Central Banks to Buy Currency

By Agnes Lovasz

June 30 (Bloomberg) -- The Swiss franc rose to a two-month high against the dollar on speculation central banks will increase holdings of the currency in their reserves.

The franc also traded near the strongest level in three weeks against the euro as investors added to bets Swiss policy makers will raise interest rates on concern inflation is accelerating. Russia's central bank may increase the share of the franc in its reserves, Interfax reported June 27, citing, Alexei Ulyukayev, first deputy chairman of the central bank.

``Global central banks are relatively underweight the Swiss franc due to low yields, but the currency's recent gains and value as a safe haven have attracted more notice,'' strategists led by Zurich-based Mansoor Mohi-uddin at UBS AG, the world's second-largest currency trader, wrote in a research note today. ``An expected rise in interest rates may add to speculations of more central bank interest.''

Against the dollar, the franc climbed to 1.0131, the highest level since April 24, before trading at 1.0185 at 3:29 p.m. in Zurich, from 1.0178 on June 27. It has strengthened more than 10 percent in 2008.

It was also at 1.6067 per euro, near the highest level since June 12, bringing its gain this year to 2.9 percent.

Investors should buy the franc for euros ``in anticipation of a rise in risk aversion,'' the UBS strategists wrote.

The Swiss Market Index of the biggest and most actively traded companies gained 0.5 percent, to 6,898.47, trimming this month's drop to 8.2 percent. The measure has lost 19 percent this year so far, heading for its worst first half since the index started 20 years ago.

The Swiss central bank this month kept its three-month Libor target rate at 2.75 percent, compared with the euro region's 4 percent rate.

The implied yield on the three-month franc interest-rate futures contract due December rose to 3.15 percent, from 2.69 percent at the start of this quarter.

Swiss government bonds fell, with the yield on the 3 percent note due January 2018 rising 2 basis points to 3.30 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net