The dollar rallied on Tuesday to its highest levels in months versus major European counterparts, after Swiss authorities intervened to weaken the franc. An unexpected rise in a key measure of the U.S. service sector helped fuel the dollar’s advance.
The ISM said its non-manufacturing index rose to 53.3 in August from 52.7 in July, with a reading above 50 indicating growth in the service sector. The modest increase came as a surprise to economists, who had expected the index to drop to 51.0.
Across the Atlantic, the Swiss National Bank announced an intervention designed to take down the “massively overvalued” franc.
Backed by recent economic figures showing that the unusually strong franc poses an acute threat to the economy and carries the risk of a deflationary development, the Swiss National Bank central bank fixed the minimum rate at CHF 1.20 per euro.
The SNB said it will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in “unlimited quantities.”
The dollar jumped to CHF 0.8615 versus the franc, its highest since May. Three weeks ago, the dollar was at a record low near 0.70.
After coming under pressure versus the euro immediately after the SNB announcement, the dollar fought all the way back to a 2-month peak of $1.3971.
The Euro zone economy grew at a modest rate in the second quarter, amid dwindling confidence levels and weak demand, with expansion in Germany, the region’s largest economy, almost grinding to a halt.
Gross domestic product grew 0.2 percent sequentially in the second quarter, latest figures published by Eurostat confirmed Tuesday. This followed a 0.8 percent expansion in the first quarter.
The dollar also gained on the sterling, rising to a 2-month high of $1.5930 from near $1.61.
Consistent gains took the buck to Y77.55 versus the yen, away from a recent record low of 75.93.
Focus shifts this week’s address to the joint session of Congress by President Obama, with the markets expecting the president to announce some concrete plans to aid job creation and boost economic growth. Additionally, Obama is expected to announce ways and means to curb the ballooning fiscal deficit.
