* Dollar falls 0.7 pct vs Swiss franc after government move
* Euro helped by short squeeze, German and French surveys
* Canadian dollar falls to new 4-1/2-year low
LONDON, Jan 23 (Reuters) - The Swiss franc rose against the U.S. dollar on Thursday after the Swiss government raised the level of capital that banks must hold against their mortgage book, tightening monetary conditions.
The euro also rose against the dollar after surveys of French and German business activity came in above expectations.
Comments from the Bank of Canada, which said currency depreciation should help exports, knocked the Canadian dollar to a 4-1/2-year low, however, while the Australian dollar was hit by a disappointing survey of Chinese manufacturers.
The U.S. dollar was 0.8 percent lower at CHF0.9043 and the euro was 0.2 percent lower at CHF1.2325 after the Swiss government's move, which coincided with this week's World Economic Forum in Davos.
The Swiss government cited "a considerable risk for the stable development of the economy" driven by strong growth in mortgage loans and residential property prices.
"This clearly shows the SNB (Swiss National Bank) is on a path where it can get more restrictive," said Ulrich Leuchtmann, head of currency research at Commerzbank in Frankfurt.
"It limits the upside potential for euro-Swiss franc," he added. "I don't think they'll abandon the 1.20 (peg of the Swiss franc to the euro) but there will be enough speculation in the market about how long it can continue."
The euro jumped 0.6 percent against the dollar to $1.3624, helped by a squeeze on traders betting against the single currency and data showing Germany's private sector grew at its fastest pace in more than 2-1/2 years in January. French business activity also shrank less than forecast.
"Those (investors) who had euro shorts for not a long time took the opportunity of momentum fading out to scale out of their positions," said Commerzbank's Leuchtmann.
The loonie, as the Canadian dollar is known, fell as low as C$1.1157 per dollar, its lowest level since July 2009, with volumes well above average levels over the past month. That brings its decline against the greenback this year to 5 percent.
The Bank of Canada took a leaf out of the Reserve Bank of Australia's (RBA) play book and tried to talk down the loonie, saying in its Monetary Policy Report that a strong currency is still hampering the country's exports.
Although the central bank stopped short of saying its next move is likely to be a rate cut, it also said it had become more concerned about weak inflation than three months ago.
"It seems as though Governor Stephen Poloz may revert back to the BOC's easing cycle as the persistent slack in the real economy continues to drag on price growth," said David Song, analyst at DailyFX.
"At the same time, the BOC made it increasingly clear that a further depreciation in the Canadian dollar should further assist with the rebalancing of the real economy."
Although the Aussie appeared to have found good support below 88 U.S. cents after surprisingly robust inflation at home on Wednesday, it fell 0.6 percent to $0.8796 on Thursday , near 3 1/2-year low of $0.8756 hit on Monday.
That came after the flash reading of the Markit/HSBC Purchasing Managers' Index (PMI) for China fell to 49.6 in January from December's final reading of 50.5.
One trader played down the importance of the survey, however, saying the fall offered a buying opportunity back up to $0.88.
The New Zealand dollar was 0.5 percent lower at $0.8269 .
The falls will be good news for hedge funds, who are betting that both currencies will weaken against a strengthening U.S. dollar as the Federal Reserve scales back its bond-buying.