Swiss Franc Holds Near Two-Week High as SNB Keeps Rates on Hold

By Lukanyo Mnyanda

Sept. 18 (Bloomberg) -- The Swiss franc held near the highest level in more than two weeks against the dollar as central bank policy makers kept interest rates unchanged for a fifth quarter to contain inflation.

The franc climbed for a second day, extending its gains in the past week to 3.5 percent. The Swiss National Bank, led by Jean-Pierre Roth, held its three-month Libor target at a seven- year high of 2.75 percent, as forecast by all 19 economists surveyed by Bloomberg. The franc stayed higher after major central banks including the SNB agreed to pump money into financial markets to restore confidence.

``Rates in Switzerland remain quite high by historical standards and we might also see a stronger franc if risk aversion remains high,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``After all the bad news, everyone is waiting for some relief.''

Against the dollar, the franc rose as much as 1 percent to 1.0916, the strongest level since Aug. 27, and was at 1.1015 by 4:02 p.m. in Zurich. It snapped a three-day gain versus the euro, slipping 0.4 percent to 1.5864.

Policy makers have left borrowing costs unchanged since September 2007 after record defaults on U.S. home mortgages led to losses at the country's two biggest banks, UBS AG and Credit Suisse Group, and threatened economic expansion. The Swiss financial industry makes up about 15 percent of the economy.

Inflation Fight

Switzerland's central bank is trying to push inflation below its 2 percent limit. Annual price growth eased to 2.9 percent in August, from a 15-year high of 3.1 percent the month before.

Earlier, the franc pared gains after the Federal Reserve authorized other central banks, including the SNB, to auction $247 billion in dollar funds to financial institutions. The action is ``designed to address the continued elevated pressures in U.S. dollar short-term funding markets,'' the central banks said.

Declining financial-market confidence encouraged investors to seek safer alternatives to carry trades, in which they borrow in a currency at a low interest rate and convert the proceeds into an asset they can lend out for a higher return. They take the risk currency fluctuations will erode their profits.

The so-called TED spread, a measure of banks' willingness to lend to each other, widened 8 basis points to 310 basis points today, after earlier surging to 314 basis points. That's higher than the 300-basis-point spread reached Oct. 20, 1987, when stocks collapsed around the world on what became known as Black Monday.

Swiss government bonds rose, with the yield on the 3 percent note due January 2018 falling 1 basis point to 2.68 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net