Swiss Franc Rises as Lehman's Collapse Sparks Aversion to Risk

By Lukanyo Mnyanda

Sept. 15 (Bloomberg) -- The Swiss franc rose against the euro and dollar as Lehman Brothers Holdings Inc.'s collapse into bankruptcy boosted demand for the safest assets, causing investors to reduce so-called carry trades.

The franc had its biggest one-day gain in six months against the dollar as stocks worldwide slumped. European government bonds and Treasuries surged as traders turned to fixed-income assets after Lehman triggered a record jump in the cost of protecting corporate debt from default. The yen rose versus all 16 major currencies as investors cut holdings of higher-yielding securities financed in Japan, which has the lowest interest rates among industrialized nations.

``The franc is strengthening with the yen on the Lehman news,'' said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking arm of France's Credit Agricole SA. ``It's all about risk at the moment.''

Against the dollar, the franc rose as much as 2.2 percent to 1.1057, the biggest gain since March 17, and was at 1.1219 by 3:53 p.m. in Zurich. It climbed 1 percent to 1.5915 per euro, from 1.6075 on Sept. 12. It may advance to 1.58 per euro this week, Maher predicted.

The Swiss Market Index of equities slid 5.1 percent, set for its biggest drop since Jan. 21, declining with other European indexes. The Dow Jones Stoxx 600 Index of European shares slipped 4.5 percent.

The Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings jumped by as much as 89 basis points, and was up 68 basis points to 614, according to JPMorgan Chase & Co. prices at 1:07 p.m. in London.

TED Spread

Investors also bought safer assets as the so-called TED spread, the difference between what the U.S. government and banks pay to borrow in dollars for three months, jumped 55 basis points to 209 basis points, the widest since Dec. 14.

The decline in financial-market confidence encouraged investors to seek safer alternatives to carry trades, where they 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 currency fluctuations will erode their profits.

The dollar fell the most in a decade against the yen as traders speculated the Federal Reserve may cut interest rates. Futures on the Chicago Board of Trade showed a 72 percent chance the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point tomorrow, compared with no chance a week ago.

Risk Aversion

``It was an extraordinary way to wake up this morning,'' Peter Rosenstreich, chief market analyst at ACM Advanced Currency Markets SA in Geneva, said in a Bloomberg Television interview. ``Risk aversion is going to stay very heavy.''

Switzerland's benchmark rate is the industrialized world's third-lowest, and compares with 0.5 percent in Japan and 4.25 percent for the 15 nations using the euro.

The franc gained even as a government report showed Swiss producer and import-price inflation eased from the fastest pace in more than 19 years in August as oil retreated from a record.

Prices for factory and farm goods and imports rose 4 percent in the year after rising 4.9 percent in July, the fastest pace since May 1989, the Federal Statistics Office said today.

Swiss government bonds surged, with the yield on the 3 percent note due January 2018 falling 12 basis points to 2.71 percent. A basis point is 0.01 percentage point. Yields move inversely to bond prices.

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