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UPDATE 1-Euro at 8-month high vs Swiss franc on higher floor talk
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By Anirban Nag
LONDON, Sept 7 (Reuters) - The euro rallied to a eight-month high against the Swiss franc on Friday on mounting speculation the Swiss National Bank will raise the floor it imposed on the currency pair, although many players were sceptical any move was imminent.
The euro firmed across the board after European Central Bank President Mario Draghi outlined on Thursday a plan for potentially unlimited bond buying to lower borrowing costs for struggling peripheral countries like Spain and Italy.
While the improved sentiment towards the euro could see it rise further against the franc in the coming days, analysts say the SNB is unlikely to raise the floor to 1.22 francs, as some speculate, from 1.20 francs currently, at least not on Sept. 13 when the central bank holds a quarterly policy review.
While markets have welcomed the Draghi plan, analysts are wary of the hurdles it faces and say the euro may give up its gains, including those against the franc.
The SNB imposed a floor of 1.20 francs on Sept 6 last year as concerns about contagion from the euro zone's sovereign debt crisis saw the safe-haven franc hit record highs, raising worries about deflation and a slowdown in the Swiss economy.
The euro rose as high as 1.21555 on trading platfrom EBS on Friday, its highest since early January as some hedge funds bought back euros they had previously sold in anticipation of the currency falling. It eased to 1.2085 francs, but was still on track for its biggest weekly gains since mid-November 2011.
Talk of raising the floor, which the SNB has been defending with massive purchases of euros, gathered pace after recent data showed the Swiss economy unexpectedly shrank in the second quarter. Consumer prices fell in August from a year ago, though at a slower pace than in July.
"Justifying a rise in the euro/Swiss franc floor at the upcoming review on the basis of the outlook for domestic inflation would not be easy and we don't expect a move from the SNB next week," said Adam Cole, global head of currency strategy at RBC Capital Markets, London.
"The spillover from the euro zone periphery still implies downward pressure on euro/Swiss franc and, in the absence of a move at next week's announcement, euro/Swiss franc pair will likely fall back toward the current 1.20 floor."
And while the floor has been breached temporarily earlier this year, when the euro fell below 1.20 francs, the SNB has said it intends to defend it with all its might.
In the process, Swiss foreign exchange reserves have bulged. Data released on Friday showed the SNB had 418.430 billion Swiss francs worth of reserves as of the end of August, equal to 71 percent of output, as the SNB continued to mop up euros.
"The reserves show that the pressure on the euro remains and we are still very negative about the single currency," said Geoffrey Yu, currency strategist at UBS.
"Some investors have been cutting short euro positions and this is helping the euro rebound against the Swiss franc. But we think that this is temporary and the pair will drop back."
Nevertheless, reflecting the growing uncertainty about the SNB's peg in the near term, one-week implied volatility , a gauge of price move expectations, has jumped to 5.5 percent from around 2.1 percent on Wednesday.
But one-month risk-reversals,, a measure of the relative demand for options on the euro rising or falling against the franc, showed a slight bias for euro weakness, suggesting some scepticism about the latest bounce. (Editing by Nigel Stephenson)
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