The dollar surged to its highest level in seven months on a trade-weighted basis on Friday as worries over fiscal problems in Europe boosted haven demand for the US currency.
Concerns over the size of Greece’s budget deficit have dogged the euro over the past month, but on Thursday those concerns spilled over into a broad flight from risk that saw global equity markets tumble and the dollar push higher across the board.
Equity markets slumped as investors attention concerns not only heightened over Greece, but switched to focus on other countries on the periphery of the eurozone, such as Portugal and Spain, which also sport large fiscal deficits and high labour costs.
Some analysts said the price action on financial markets was reminiscent of that at the height of the financial crisis sparked by the collapse of Lehman Brothers in September 2008.
Indeed, the price of insuring Portuguese government debt against default hit a record high, while the cost of insuring against Spanish and Greek default also rose.
Worries over budget problems on the periphery of the eurozone were heightened by comments from Jean-Claude Trichet, president of the European Central Bank, on Thursday.
Mr Trichet took a tough line on fiscal discipline. He said he approved of Greece’s plans to reduce its deficit, but maintained the ECB’s stance on the European Union’s stability pact, which requires government deficits of less than 3 per cent of gross domestic product, was “inflexible”.
Ulrich Leuchtmann at Commerzbank said Mr Trichet made it clear that there would be no exception made for Greece.
“Mr Trichet’s firm attitude has fuelled fears of horror scenarios, in particular as the crisis is spreading. We are no longer dealing with a Greece crisis but a crisis in Portugal, Ireland, Italy, Greece and Spain,” he said.
Mr Leuchtmann said similar to the financial crisis in 2008, this crisis too could turn into a “wild fire”.
“It might have effects on other countries, banking systems and in the end once again on the global economy. But contrary to the rescue plans for the banks there might not be an institution strong enough to intervene,” he said.
“Hardly surprising therefore that similar reflexes are dominating the markets as during the financial markets crisis: a flight into quality and a drying up of liquidity.”
The dollar index, which tracks its progress against a basket of currencies, rose 0.4 per cent to a high of 80.435, its strongest level since July 13.
The dollar also hit an eight-month high of $1.3581 against the euro, before giving back some of its gains to stand up 0.3 per cent at $1.3694.
Elsewhere, the dollar rose 0.4 per cent to an eight-month high of $1.5695 against the pound, climbed 0.5 per cent to Y89.42 against the yen and gained 0.5 per cent to SFr1.0725 against the Swiss franc.
The Swiss franc also lost ground against the euro after the Swiss National Bank was suspected of intervening to stem the rise of its currency during Asian trade for the first time ever.
Dealers said the Swiss National Bank, which usually intervenes in the currency markets later in the trading day, was forced to enter the market as the Swiss franc surged to a high of SFr1.4559 against the euro.
This was the Swiss franc’s strongest level against the euro since October 2008. The move took the franc above last March’s high of SFr1.4576 against the single currency, an event which prompted the SNB to start intervening to stem the rise of its currency in a bid to counter deflationary pressures in the Swiss economy.
The Swiss franc dropped violently in a matter of minutes, hitting a low of SFr1.4851 against the euro according to Reuters data as talk that the SNB had intervened in the market circulated round the world’s trading desks.
Dealers said the Swiss franc traded even lower on the EBS electronic trading platform, with the SNB bidding to buy euros against the Swiss franc at SFr1.4905.
Traders said the action by the SNB caused confusion, creating a two-tier market as not all banks in Asia could see the bid from the central bank on their dealing machines.
This is because few banks in Asia have credit limits for the SNB, deeming it unnecessary since the central bank has not previously intervened in their time zone.
In the aftermath of the suspected action, buyers stepped in to push the Swiss franc higher, however.
By late morning in London, the Swiss franc was 0.3 per cent lower at SFr1.4687 against the euro.
