NEW YORK (Reuters) -- The U.S. dollar and euro jumped against the Swiss franc Thursday after the Swiss National Bank said it was intervening in the foreign exchange market as it faced the growing risk of deflation.
The Swiss central bank said it was implementing its decision to buy foreign currencies. The SNB also cut interest rates on Thursday by a quarter percentage point to a historic low, offering three-, six- and 12-month funds at 0.05%.
The SNB, which last intervened in August 1995, further said it will buy not only foreign currencies but bonds as well. Switzerland is facing its worst recession in over three decades.
A "very, very strong statement from the Swiss National Bank about what they are doing and about to do," said Karthik Sankaran, Portfolio Manager and Principal at Covepoint Capital Advisors LLC In New York. "They are the first central bank that is actually using the purchase of foreign currency as a means of quantitative easing."
In late afternoon New York trading, the dollar rose 2.96% to 1.1876 Swiss francs, on track for its biggest one-day gain since August 1995, at current prices. It rose as high as 1.1965 francs, a three-month high, according to Reuters data.
The Swiss franc is one of the world's most traded currencies, at times prized as a safe haven for investors.
The euro climbed to 1.5302 Swiss francs, the highest since December. It last traded at 1.5234, up 2.9%, the euro's best day ever against the Swiss currency.
SNB's move to zero rates and quantitative easing was expected, traders said, but the immediate move to intervene was a surprise.
Bank of New York-Mellon senior currency strategist Michael Woolfolk said "the way this was communicated was intended at maximizing its shock value." He said there were no hints from SNB officials ahead of time that intervention would be immediate.
"They changed their economic outlook, they not only lowered interest rates to effectively zero but also announced quantitative easing and currency intervention. This was the full monty," Woolfolk said.
Quantitative easing has been deployed by central banks in countries including Britain, where the central bank is buying assets with newly created money.
Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York, said the SNB intervention should ease pressure on Poland and Hungary, two European emerging market countries seriously hit by the global credit crisis.
These two countries had taken advantage of ultra-low Swiss interest rates, borrowing heavily in Swiss francs and investing in riskier assets.
"The strength of the Swiss franc compounded their woes. Today's dramatic weakening of the Swiss franc may ease this pressure," said Chandler.
Gains in the dollar versus the Swiss franc boosted the greenback against other major currencies such as the euro and sterling.
The euro fell 0.1% to $1.2871. The euro zone single currency was also pressured by comments from European Central Bank President Jean-Claude Trichet that euro zone interest rates could be cut further.
The ECB cut its benchmark rate to a record low 1.5% last week and economists expect it to cut to 1.0%, most likely in April.
Sterling rose 0.1% to $1.3867.
The SNB news overshadowed all other events and data in the market including U.S. retail sales numbers that were better than expected and weekly jobless claims data that were not far from analysts' forecasts.
Against the yen, the dollar erased early losses, partly because of firmer U.S. stocks, still one of the key drivers in the currency market. Stocks were lifted by energy shares and the U.S. retail sales report. The dollar rose 0.6% to 97. READ MORE..
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