* Franc falls sharply, long-term funds cited behind move
* Euro resists more falls, helped by inflation data
* Dollar rebounds to 104.40 against yen
By Patrick Graham
LONDON, Jan 7 The Swiss franc fell to its lowest against the euro since October on Tuesday, with some analysts arguing global economic optimism had laid the ground for a retreat for one of the world's strongest and "safest" currencies.
Market strategists say hedge funds were burned a number of times last year betting on the unwinding of the flood of money into the perceived security of the franc between 2008 and 2011.
While most market players remained cautious about the spike in the euro on Tuesday, analysts from UBS pointed to signs that Swiss funds and banks are beginning to invest and loan money abroad again - something they have not done since 2008 and one important precondition for the franc falling back.
Data on Tuesday also showed Swiss National Bank foreign currency reserves fell by almost 700 million francs in December - suggesting pressure on its cap on the franc, which previously forced it to buy billions of euros, had eased.
That would all play into a change in the broader environment since the U.S. Federal Reserve said last month it would begin to curb its bond-buying stimulus.
"People tended to play the weaker franc last year and a lot of them got frustrated. Now there may be a new attempt," said Beat Siegenthaler, currency strategist with UBS.
"The question has always been what would be a trigger (for a turn around in the franc). It could have been the easing of the euro crisis and that didn't happen. So maybe it is the change in the U.S., the feeling of broader optimism and change in the dollar that may come from economic improvement there."
The euro rose 0.4 percent to 1.2366 francs, its highest since Oct. 30 and more than three cents above the 1.20 per euro cap which the SNB has held in place for more than two years. The franc also lost 0.2 percent to $0.9059.
UBS had a near-term target of 1.25 francs to the euro, Siegenthaler said.
The gains for the euro were more widespread in morning trade, helped by a euro zone inflation number which was not expected to be low enough to force the European Central Bank into more action immediately to loosen monetary policy.
German retail sales and unemployment data were also both better than expected as well, while Ireland's successful bond issue offered more optimism on the bloc's debt strugglers.
The single currency was up 0.2 percent at $1.3651.
The dollar held on to early gains against the yen, up 0.2 percent to 104.4 yen after having fallen 0.6 percent on Monday to 103.91 yen, a low not seen since Dec. 23. It has pulled back from a five-year peak of 105.45 yen set last week.
The dollar index was almost unchanged at 80.680.
Analysts said some of those betting on more euro losses after a weak start to the year had been disappointed, with the single currency having pulled away from Monday's one-month low of $1.3572.
That may change with Friday's U.S. jobs report, which may give a clue as to how quickly the Federal Reserve will taper its bond buying. Overall the outlook on interest rates is against the euro.
"We expect to see good interest to buy USD on dips heading into the jobs release, and remain short EUR/USD as a trade recommendation," analysts from BNP wrote in a note to clients.