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* Swiss franc slides to 2-week low vs euro and dollar
* Speculation of euro/franc target after newspaper report
* Flows into Swiss not speculative; target level may be hard
* Franco-German summit and subject of eurobonds in focus
By Neal Armstrong
LONDON, Aug 15 The Swiss franc slumped to
two-week lows against the euro and the dollar on Monday on
speculation the Swiss National Bank would act further to counter
strength in the currency by setting an exchange rate target.
Speculation of a target level against the euro gained ground
after Swiss newspaper SonntagsZeitung reported on Sunday a lower
limit for the euro/Swiss pair was poised to be set.
But dealers said the sell-off in the franc was being driven
by speculation ahead of a government meeting on Wednesday, with
the SNB now having key backing from Switzerland's largest
political party, easing one of the barriers to direct selling to
weaken the franc.
"The market now sees the possibility that the SNB has a plan
and this is making people nervous about the Swiss franc," said
Manuel Oliveri, currency strategist at UBS.
"There is also some speculation that they may target a rate
of 1.20 francs which seems to be driving today's moves, but as
yet the SNB hasn't mentioned a level and we have to wait until
the outcome of Wednesday's government meeting," he added.
The euro soared as high as 1.1458 Swiss francs on trading
platform EBS, and was last up 2.5 percent on the day at 1.1363
francs. Last week, the euro hit a record low around
Implied volatility in euro/Swiss remained near historic
highs in the short-dates, with one-month vol trading around 24
percent, near last week's record level of around 27 percent,
showing the market is nervous over potential for further sharp
swings in the spot rate.
The dollar jumped 2.1 percent to 0.7938 francs , off an
early European high of 0.7998.
Some market players questioned whether implementing a target
level for euro/Swiss would be effective, given the nature of the
flows which have driven strength in the franc.
"We are skeptical of the idea of targeting a level as Swiss
strength is being driven by savings deposits and other
real-money flows out of the euro zone and into Switzerland,
rather than speculators," said Kiran Kowshik, currency
strategist at BNP Paribas.
"These flows are unlikely to reverse unless and until the
underlying drivers of those flows become less relevant," he
said, adding the sheer size of the forex market would make
sustaining a target level difficult for the SNB.
Turbulence in equity markets amid risk aversion following a
downgrade to the U.S. sovereign rating and an ongoing euro zone
debt crisis have seen the safe-haven Swiss franc rocket to
record highs, prompting the SNB to slash interest rates to near
zero and threaten to weaken its currency.
There was some semblance of normality in markets however,
with Wall Street ending higher on Friday after
stronger-than-expected U.S. retail sales data. European markets
were also in positive territory on Monday after last week's
introduction of a short-selling ban in France, Italy, Spain and
U.S. RETAIL DATA SUPPORTS DOLLAR
The dollar regained some footing against the yen after
retail sales posted the biggest gains in four months in July.
The dollar last exchanged hands at 76.80 , up 0.2
percent for the day. It briefly rose to a session high of 77.10
The sharp rise in euro/Swiss helped the euro to rise 0.3
percent against the dollar to $1.4309 .
Analysts said the euro could gain further amid signs Germany
might be softening its stance against a euro zone bond.
Conservative newspaper Welt am Sonntag reported on Sunday
the German government no longer rules out agreeing to the
issuance of euro zone bonds as a measure of last resort to save
the single currency.
Just Friday, the German finance minister had rejected the
idea, saying this would undermine the basis for the single
currency by weakening fiscal discipline among member states.
(Editing by Toby Chopra)