Speculation that Switzerland's central bank could take further measures to weaken the Swiss franc dragged the currency down against its major rivals Friday, while other currencies stabilized after a week of rollercoaster trading.
The Swiss franc fell more than 2% intraday against both the dollar and the euro, as investors abandoned their bets that the classic safe-haven currency would strengthen further.
"All of the attention is on the Swiss National Bank. They certainly managed to have a material impact on the Swiss franc without doing anything," said David Watt, currency strategist at RBC Capital Markets in Toronto.
Earlier in the week, SNB Director Thomas Jordan triggered market speculation after suggesting that defending a temporary target for the euro-Swiss franc is plausible, as long as such a peg contributed to price stability. But in the past week, the SNB trimmed rates to close to zero and flooded the Swiss money market with liquidity in an attempt to make franc deposits less attractive to global investors.
Some analysts say that the SNB will likely utilize other options before resorting to a euro-peg, including additional liquidity measures, especially since a peg would likely require further intervention to defend the target band.
Meanwhile, the euro and the dollar saw little change on the day against their other major rivals, as investors largely stuck to the sidelines. Late Thursday, several European governments--including Spain, Italy and France--imposed bans on short selling of financial shares, aimed at reining in what many view as rampant speculation. That helped ease concerns about volatility in financial markets and took some pressure off the euro.
On Friday, a healthy U.S. July retail sales report was later overshadowed by the weakest consumer sentiment data in 31 years, leaving investors with little momentum to take major positions ahead of the weekend.
"It's still very much of a risk driven environment and I think there is a fair amount of relief that we stabilized going into the end of the week," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J.
Late Friday, the euro was at $1.4250 from $1.4241 late Thursday, according to EBS via CQG. The dollar was at Y76.72 from Y76.83, while the euro was at Y109.32 from Y109.29. The U.K. pound was at $1.6277 from $1.6230. The dollar was at CHF0.7781 from CHF0.7620.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 74.565 from about 74.677.
Riskier currencies will likely be able to gradually make a rebound after the weekend, as investors file back into long-risk positions, in a reversal from the massive flight out of risk earlier this week, analysts said. They point to the Australian and New Zealand dollars as likely recovering some of this week's losses against the U.S. currency.
In addition, market volatility is expected to ease now that markets have had time to adjust to Standard & Poor's downgrade of the U.S. credit rating and concerns about the euro-zone debt crisis have lessened.
"The market is both literally and figuratively exhausted at this point. When you have bursts of volatility, they don't go away as fast as they came, but they do go through a slow withering death," said Greg Anderson, strategist at Citigroup. "I do expect we're going to start the slow withering death of volatility next week."