Swiss franc plunges 10 percent vs euro on SNB shocker

NEW YORK (Reuters) - The Swiss franc plunged nearly 10 percent against the euro on Tuesday, posting its worst day ever, after Switzerland's central bank jolted markets by setting a limit on how much the franc can gain.

The euro surged after the Swiss National Bank said it would enforce a limit of 1.20 francs to the euro by buying foreign currencies in unlimited quantities. The dollar also rose sharply, gaining 9.6 percent against the franc.

Investors have poured money into the franc, which they see as one of the few safe places for assets amid global financial turmoil. The franc's rise sparked worries among Swiss officials that its export-driven economy will be damaged by the currency's strength.

"When a central bank communicates that it doesn't want its currency to strengthen, it's generally a bad idea to go against that central bank. Today is a reminder why," said Jonathan Lewis, founding principal at Samson Capital Advisors, with assets under management of $7 billion.

The euro rose as high as 1.22 francs on trading platform EBS, ending four days of losses.

The SNB's latest move comes after it cut its already low interest rate target to nil on August 3. It also flooded the banking system with francs, effectively driving money market and forward rates deep into negative territory and making holding Swiss francs a costly proposition for investors.

The SNB had made repeated warnings that it wouldn't tolerate a strong currency.

Many analysts believed the SNB may have finally instilled fear in investors still trying to seek shelter in the franc away from the euro zone's sovereign debt crisis. The SNB's ability, however, to hold the floor at 1.20 francs to the euro will very much depend on developments in the euro area.

"An intensification of the euro zone crisis is a reasonable prospect and such an event could yet result in a significant step up in demand for the Swiss franc," said Jane Foley, senior currency strategist at Rabobank in London.

However, since there is zero inflation in Switzerland, the SNB could potentially just print francs and sell them on an unlimited basis to counter the surge in currency inflows. For this reason, Foley believes the 1.20 cap on the euro/Swiss franc could hold in the near term.

In late trading, the euro was up 8.7 percent at 1.20550 francs, rising a low of 1.10200 and a closing level at 1.11000 on Monday,

The Swiss franc has dropped roughly 20 percent versus the euro in the past month as the single currency has soared from a lifetime low of 1.00750 hit on August 9 on EBS.

As a result, fund managers who took bets that the franc would fall around that time were sitting on hefty gains.

The U.S. dollar rose as high as 0.86250 franc on EBS and was last up 9.4 percent at 0.86150 franc, snapping a four-day drop against the franc.

FLOWS INTO NORWAY

The Swiss central bank action also funneled some safe-haven flows into the Norwegian crown, a currency with robust fundamentals -- an oil exporter and a country with a current account surplus. The euro fell 1.2 percent against Norway's crown to 7.5772.

One-month implied volatility on the euro/Norwegian crown pair, a measure of the market's expectations of future movements in either direction, jumped to 9.7 percent from 8.4 percent late on Monday, suggesting more trading action seen on this cross.

Despite the euro's steep gains against the Swiss franc, the single currency fell against the dollar, down 0.7 percent on the day at $1.39910. It fell to a low of $1.39720, trading below its 200-day moving average around $1.40150 for the first time since July 12.

Market players said the key risk for the euro this week was that the European Central Bank would signal a pause in its rate tightening cycle.

Concerns that the next tranche of bailout funds for Greece may be delayed, worries about European bank funding and rising Italian government bond yields on speculation Rome may struggle to implement new austerity measures kept the euro under pressure.

The dollar rose against the yen on EBS on speculation the SNB's measures could encourage Japanese authorities to intervene in coming days. The dollar was up 1.0 percent at 77.690, well off a record low of 75.941 struck on Aug 19.

(Additional reporting by Nick Olivari: Editing by Diane Craft)