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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 to maintain
* Franco-German summit and subject of eurobonds in focus this week
By Neal Armstrong
LONDON, Aug 15 (Reuters) - 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 1.0075 francs.
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 Belgium.
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. [ID:ID:nN1E77B08W]
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 yen.
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)