Swiss move masks bigger picture dollar bid

Some weeks ago discussion surfaced over a possible peg for the Swiss franc against the euro after safe haven flows created a sustained advance in the value of the few currencies outside of the euro-area. Having dotted the “i’s” and crossed the “t’s” the plan apparently caught the Swiss bulls on the hop on Tuesday forcing the franc to halve its year-to-date gains of 13% versus the euro in the space of just a few moments. The move to peg the Swiss franc at a value of Sfr1.20 per euro cast an unusual veil over proceedings. It sent the dollar surging against both the yen and Swiss franc, while creating a wave of risk appetite that sparked gains for the euro, pound and other risk havens against the dollar. But widening gloom over the prospects for the global economy soon reversed appetite for the dollar and quickly delivered losses for the Aussie, pound, euro and more.

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U.S. Dollar – Right out of the gate on Monday stocks were on the decline. A 12-point loss for S&P index futures doubled in the space of two hours as concerns grew for the health of the U.S. economy. Friday’s employment report has left the markets with a nasty aftertaste and a sour reminder that the policy tools left on the table are limited. One story running this morning claims that according to sources, President Obama is on the verge of a prolific tax cut. One would expect that sentiment would have been reversed by that news. Instead, investors are falling over themselves in a scramble to get out of the burning theater. The dollar index reached a six-week high after suffering a sharp fall as investors responded to the Swiss National Bank’s move to pull the stairs from beneath its franc. The dollar index trades 0.5% better on Monday at 75.58 as pre-market stocks slide. Investors are keenly waiting for the August non-manufacturing ISM report due later today. The report covers the service sector or 90% of the economy with the index anticipated to fall towards the 50-line indicating neither expansion nor contraction. The last time the index fell into the contractionary zone was in November 2009.

Euro – The euro surged by 7% against the Swiss franc as investors either mistimed or underestimated the SNB’s euro/Swiss peg at Sfr1.20000. The surge in Swiss selling initially drove the euro higher against the dollar lifting it to by more than two-whole cents to as high as $1.4283. However, as investors monitoring the performance of U.S. equity benchmarks saw deepening losses unfurl they were quick to lose appetite for the single currency. The gains were quick to turn to losses with the euro now trading at $1.4075 and creeping ever-closer to an excursion into a whole new range beneath $1.4000. Second-quarter GDP across the Eurozone of just 0.2% saw the area expand by 1.6% in the course of the last year. However, the make-up sorely disappointed with household consumption and government expenditure both falling by 0.2% in the three months ending June. Meanwhile gross fixed capital formation expanded at a 0.2% rate and down from a 1.8% pace in the first three-months of the year. German factory orders for July were equally dismal with export demand the culprit behind a 2.8% month-to-month slide.

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