Swiss franc falls while euro gains before key meeting

Wads of 200, 100 and 50 Swiss Franc notes are seen in this illustration picture taken in the treatment centre of the Canton of Vaud Bank near Lausanne February 17, 2011.

NEW YORK (Reuters) - The Swiss franc fell to a two-week low against the euro and dollar on Monday on speculation the Swiss National Bank may soon take action to curb gains in the currency by setting an exchange-rate target this week.

The euro, meanwhile, rose to nearly three-week highs against the dollar, boosted by some expectations of a positive outcome of Tuesday's meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel to discuss the euro zone's debt crisis.

Any signs Germany might be softening its stance against a euro-zone bond will likely support the euro, analysts said.

Leading German business groups called on Monday for joint euro-zone bond issuance, despite their government's opposition, and the European Central Bank showed its intent to defend Italy and Spain.

"Markets are positioning for a softening in Germany's resistance to a more integrated fiscal union," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"The markets, however, are overly optimistic and are setting up to be disappointed tomorrow," he said. "While more steps toward integration will probably happen down the road, it is not likely to emerge this week."

The franc could pare recent losses and the euro could curb gains if Tuesday's meeting disappoints.

In late afternoon New York trading, the euro was up 2.3 percent at 1.1340 francs, though it was off a high of 1.14584 hit earlier on trading platform EBS, its strongest level since late July. Current levels were way above last week's record low around 1.0075 francs.

The dollar was at 0.7850 franc, up 0.9 percent and far above last week's record low of 0.70676.

FRANK TALK ABOUT THE FRANC

Talk about a Swiss franc peg intensified ahead of a government meeting on Wednesday, with the SNB having key backing from Switzerland's largest political party.

BNP Paribas said the Swiss franc is susceptible to renewed strength if the markets do not receive some official signals of pending actions by mid-week.

In fact, recent franc strength was not driven by traditional speculator buying, but rather evidence shows that much of the inflow to the franc has been deposit flows and other "real money" activity fleeing uncertainty in the euro zone, the firm said in a research note.

"These flows are unlikely to reverse any time soon."

Shaun Osborne, chief currency strategist at TD Securities in Toronto, said that after two days of aggressive short covering, investors believe that the SNB may consider the 1.10- to 1.15-franc area as the central point of a potential "fixed" trading band.

The euro rose sharply against the dollar, helped by a weak New York manufacturing index.

The euro was last trading up 1.4 percent at $1.4446.

"There are still plenty of negatives in the U.S. economy, euro-zone economy and global economy, which should keep the euro in the $1.40 to $1.45 range," Commonwealth's Esiner said.

The euro also benefited from news that the European Central Bank spent 22 billion euros ($31 billion) on government debt last week.

The dollar was last up 0.2 percent at 76.800 yen, but not far from a record low of 76.250 hit in mid-March. Investors are reluctant to push the yen higher because of the threat of Japanese intervention to weaken it, but are equally uncomfortable selling it against the dollar, given uncertainty about the U.S. economy's slowdown.

(Additional reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Jan Paschal)