Swiss Franc Gains Against Dollar, Euro Before SNB Rate Decision

By Agnes Lovasz

Sept. 13 (Bloomberg) -- The Swiss franc rose to its highest against the dollar in almost 2 1/2 years on speculation the central bank will lift interest rates today to ward off inflation.

The franc also snapped three days of losses against the euro before Swiss National Bank policy makers are expected to raise rates a quarter point to 2.75 percent, according to a Bloomberg News survey of economists. This would make the franc less popular to carry trade investors, who sell the currency to fund higher- yielding purchases elsewhere.

``They are going to raise rates because they are very focused on normalizing monetary policy,'' said Niels From, a currency strategist at Dresdner Kleinwort in Frankfurt. ``The focus will be on the comments after the meeting and the baseline is they're going to hike further. The franc could gain ground.''

Against the dollar, the franc advanced to 1.1814, the highest since April 2005, and was trading at 1.1821 by 11:16 a.m. in Zurich. It rose to 1.6455 per euro, from 1.6475 yesterday.

The Zurich-based central bank has raised borrowing costs seven times since 2005 and has signaled it's prepared to lift them again. The decision is due at 2 p.m. local time.

Switzerland's main rate is the second lowest among major economies after Japan. The franc has risen 2.1 percent this month against its U.S. counterpart as investors shunned high-yielding assets funded with loans in the Swiss and Japanese currencies on concern the collapse of the U.S. subprime mortgage market will drag down global economic growth.

In a carry trade, investors borrow funds in a country with low borrowing costs and convert the proceeds into a currency they can lend out a higher rate. They earn the spread between the borrowing and lending rates. The risk is that currency market moves may erase their profit.

Swiss government debt advanced, with the yield on the 4.25 percent bond due June 2017 falling 3 basis points to 2.80 percent. Yields move inversely to bond prices.

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