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Wed 10 Aug 2011 09:07 AM

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Dollar drops 5% versus Swiss franc on Fed remarks

Investors watch out for any intervention from Swiss National Bank to slow nation's surging currency

Dollar drops 5% versus Swiss franc on Fed remarks

The dollar fell broadly, plunging more than 5 percent
against the Swiss franc at one point on Tuesday, as the Federal Reserve's
pledge to keep rates near zero for another two years further diminished its
allure to global investors.

It was a volatile trading day, with the dollar initially rising
versus commodity currencies such as the Aussie and New Zealand dollars after
the Fed's statement and the euro trimming gains. But that reversed in late
trading as US stocks rallied sharply.

Analysts said it was once again an affirmation to sell the
dollar.

"We view the [Fed] statement as aggressively dovish,
even beyond our expectations," said Dan Dorrow, head of research at Faros
Trading in Stamford, Connecticut.

"This is euro/dollar positive and equity-positive
because the explicit two-year period, until mid-2013, for 'on rock-bottom-hold'
will anchor the short-end of the dollar yield curve and impact euro/dollar
interest-rate differentials."

Global investors were initially disappointed that the Fed
offered no new ideas to stop the US economy from sliding back into recession.
They were hoping for more aggressive bond purchases to boost a flagging
economy.

"What surprised me about the Fed statement was how
negative it was. There was a contingent of people that were hoping that the Fed
will pull out some sort of magic bullet to stimulate the economy," said
Jeffrey Sica, president and chief investment Officer of SICA Wealth Management
in Morristown, New Jersey, which has $1bn of assets under management.

"Investors sold off because they're hit with the fact
that 'Wow, we are really in a recession' and there may be no overnight
cure."

The dollar fell to an all-time low of 0.70676 franc on trading
platform EBS after the Fed statement and was last at 0.71955, down 4.7 percent.
The greenback has lost nearly 23 percent of its value against the franc so far
this year and there seems to be no let-up in selling.

It was the worst trading day ever for the dollar against the
Swiss franc.

The euro dropped to its lowest on record as well at 1.00750
francs and last changed hands at 1.03380 francs, down 3.4 percent for the day.

Investors are now on high alert for any intervention from
the Swiss National Bank to slow the surging Swiss currency.

The SNB, though, may be reluctant to intervene after
attempts to weaken the franc when the euro fell below 1.50 in the wake of the
Lehman crisis left the central bank sitting with heavy losses.

One-month implied volatility in euro/Swiss - a measure of
the market's expectations of future movements in the currency pair - hit record
levels of more than 32 percent.

The euro has fallen about 15 percent versus the franc IN
2011. Analysts said the euro could reach parity with the franc, despite the
SNB's recent move to cut interest rates and warnings over the franc's strength.

The euro, however, gained 1.3 percent against the dollar to
$1.42600.

The dollar fell as low as 76.700 yen on EBS, not far from a
record low of 76.15 yen reached in mid-March. It last traded at 76.980, down
0.9 percent. Last week, Japan intervened when dollar/yen was trading around
77.10 yen.

Japanese finance minister Yoshihiko Noda repeated on several
occasions that he was watching markets closely, but said authorities would wait
to see market reaction to the US Fed decision before deciding whether to act
again.

"Once the dust settles on this latest global panic, the
dollar is going to be the lead funding currency [in carry trades] with no
interest-rate risk through next year," said Jay Meisler, co-founder of
Global-View.com, a forex discussion site.

"This is a big assumption, but if things stabilize, it
is hard to make a case for holding dollars."

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