Swiss Franc Declines Versus Dollar as Stocks in Europe Rally

By Agnes Lovasz

Aug. 5 (Bloomberg) -- The Swiss franc fell to the lowest level against the dollar since mid-May as gains in European shares gave investors the confidence to buy higher-yielding assets funded in Switzerland.

The franc, often used to finance so-called carry trades because of the country's low borrowing costs, also declined against the Brazilian real and the South Korean won. The dollar was supported before a Federal Reserve meeting today at which policy makers may leave interest rates unchanged and highlight concern about inflation.

``We expect the franc to remain weak,'' said Manuel Oliveri, a currency strategist in Zurich at UBS AG, the world's second- biggest currency trader. ``Risk appetite's momentum remains strong and this is limiting gains in the franc.''

Against the dollar, the franc dropped to 1.0521 by 11:16 a.m. in Zurich, from 1.0483 yesterday, extending its loss this quarter to 3.1 percent. It reached 1.0542 earlier, the weakest level since May 19. Against the euro, it was at 1.6308, from 1.6327.

The franc will fall to 1.63 per euro in the coming month, UBS forecast. The Swiss currency declined to 1.4823 real, from 1.4884, and to 966.6929 won, from 970.7133.

The Swiss Market Index of the biggest companies climbed 1.2 percent, and the Dow Jones Stoxx 600 Index advanced 1.7 percent. Futures on the Standard & Poor's 500 Index expiring in September added 0.7 percent.

Gains in stock markets prompted investors to add to carry trades, where they get funds in a country with low borrowing costs and invest in those with higher interest rates, earning the spread between them.

Global Rates

Switzerland's target rate of 2.75 percent is the third lowest among industrialized nations, after Japan and the U.S. The equivalent rate for the 15 nations sharing the single currency is 4.25 percent.

The Federal Open Market Committee is scheduled to announce its decision at about 2:15 p.m. in Washington. The benchmark rate will be held at 2 percent, according to all 69 economists surveyed by Bloomberg News.

Traders reduced bets the Swiss National Bank will raise borrowing costs this year, futures prices show. The implied yield on the three-month Swiss franc interest-rate futures contract due December fell 2 basis points to 2.87 percent today. It has dropped 18 basis points in the past month.

Swiss government bonds were little changed, with the yield on the 3 percent note due in January 2018 holding at 3.06 percent. Yields move inversely to bond prices. The yield advantage of 10-year U.S. notes over comparable Swiss government debt widened to 92 basis points today, from an average 71 basis points during the past month.

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