Swiss Franc Drops as Fannie, Freddie Takeover Boosts Confidence

By Andrew MacAskill

Sept. 8 (Bloomberg) -- The Swiss franc fell to its lowest level in more than eight months against the dollar and slid versus the euro after the U.S. government's takeover of Fannie Mae and Freddie Mac sparked demand for higher-yielding assets.

The franc's third straight decline sent it lower against all 16 major currency counterparts tracked by Bloomberg. Rising equities worldwide boosted the allure of so-called carry trades, where investors buy higher-yielding assets such as stocks with money from Switzerland.

``The U.S. takeover plans of Freddie and Fannie have led to a significant rebound in risk appetite and clearly that has weighed heavily on the Swiss franc,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``This means the franc will continue to weaken in the coming weeks.''

Against the dollar, the franc dropped to as low as 1.1317, the weakest level since Jan. 2, and was trading at 1.1294 by 2:41 p.m. in Zurich, from 1.1188 at the end of last week. The franc had its biggest drop in more than four months against the euro, trading at $1.6046, from $1.5960.

The MSCI World Index climbed as much as 1.9 percent, its biggest gain since April 16, and the Swiss Market Index, a benchmark for the largest and most actively traded companies, climbed 3.6 percent, the most since January.

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed the two firms in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent.

Carry Trades

Rising stock markets encouraged investors to resume carry trades, whereby investors borrow in a currency at a low interest rate and convert the proceeds into one they can lend out for a higher return. They take the risk that currency fluctuations will erode their profits.

Switzerland's target rate of 2.75 percent is the third lowest among industrialized nations, after Japan and the U.S. This Swiss benchmark rate compares with 8 percent in New Zealand, 7 percent in Australia and 4.25 percent in the euro region, making it an attractive source for carry-trade funding.

When carry-trade appetite increases, investors might sell the franc to buy higher-yielding assets, sending the safe-haven currency such as the franc lower. When carry-trades wane, traders may use the higher-yielding currencies to buy the franc, boosting its value.

Swiss government bonds fell, with the yield on the 3 percent note due in January 2018 rising 4 basis points, to 2.81 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net