Swiss Franc Trades Near Two-Month Low as Carry Trade Resumes

By Kim-Mai Cutler

Sept. 19 (Bloomberg) -- The Swiss franc traded near a two- month low against the euro as investors returned to carry trades after the Federal Reserve cut interest rates by a half-percentage point.

The Fed lowered its benchmark interest rate by more than economists had forecast yesterday, spurring stock markets and reviving appetite for riskier investments. The Swiss franc is popular among investors who borrow it at 2.75 percent to convert into other currencies that can be lent out at higher rates.

``With the Fed looking like it's riding to the rescue for risk-takers by delivering more than expected with rate cuts, we can expect more of a return to the carry trade,'' said Martin McMahon, a currency strategist at Credit Suisse Group in Zurich. ``The Swiss franc is going to come under pressure.''

Against the euro, the franc traded at 1.6499 by 11:30 a.m. in Zurich, from 1.6521 late yesterday, when it reached the lowest since Aug. 3. It was little changed at 1.1812 per dollar.

Carry-trade investors earn the spread between the rates at which they borrow and lend out money and the risk is that currency moves may erase their profit.

Switzerland has the second-lowest interest rate among industrialized nations, even after the Swiss National Bank last week raised it for the eighth time since late 2005 to curb inflation. SNB President Jean-Pierre Roth said on Sept. 14 there's a need to raise borrowing costs ``from time to time'' to keep price growth in check.

Most economists surveyed by Bloomberg News had expected the Fed to cut rates a quarter-point yesterday to 5 percent.

The yield on the 4.25 percent Swiss government bond due June 2017 rose 4 basis points to 2.91 percent.

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