FOREX-Swiss franc set for biggest monthly drop vs euro in divergence trades

* Franc breaks through major technical levels vs dollar

* Still most “overvalued” currency in G10 -Morgan Stanley

* Graphic: World FX rates in 2017

LONDON, July 28 (Reuters) - The Swiss franc fell for a fourth consecutive day on Friday and is on track to post its biggest monthly drop in six years against the euro as some hedge funds sold the currency after it broke through major technical levels this week.

The franc’s drop against the euro came after Swiss National Bank chief Thomas Jordan reiterated in an interview to Le Temps on Monday that the currency was still “significantly overvalued”.

The SNB’s accommodative stance towards more currency weakness was in contrast to the optimism sounded by the European Central Bank last week at a scheduled policy meeting and that of other major central banks around the world, who are actively discussing withdrawing years of massive monetary stimulus.

The ECB’s apparent lack of concern about a strengthening euro convinced markets the central bank remained on track potentially to begin tapering its bond-buying stimulus later this year.

“Jordan’s comments have set the tone for the franc move this week and I think the franc’s weakness has certainly more room to run,” said Thomas Flury, head of currency strategy at UBS Wealth Management’s Chief Investment Office.

Traders said the franc’s weakness against the dollar since last week has also been a factor in its drop against the euro.

After the franc tumbled through the 1.10-1.11 range against the euro, the fall quickly accelerated on the back of some hedge fund selling.

“There is some rebalancing flows going through from some model-driven funds after euro/franc cracked through the 1.10 level and with very little option barriers at these levels, this can go higher,” Scotiabank’s head of Asian FX sales and trading, Gerrard Katz, said.

The franc was trading 0.7 percent weaker against the dollar CHF= at 97.11 cents. It has fallen nearly 3 percent this week, its biggest weekly drop since October 2015.

The currency was down a percent at 1.1372 against the euro EURCHF= and traded below a 200-week moving average for the first time since September 2008, according to Reuters data.

Morgan Stanley strategists expect more losses on the view that the franc remains the “most overvalued currency in the G10 universe” despite this week’s fall.

“The bearish franc trade is an alternative approach to trading better prospects for European Monetary Union economic and political stability,” they wrote in a morning note.

Elsewhere, the Swedish Krona gained 1 percent against the dollar to 8.13 after Sweden reported economic growth in the second quarter at 1.7 percent compared to a forecast of 1 percent.

The dollar index broadly marked time against a basket of six major currencies and was a shade lower at 93.73 after edging up 0.2 percent the previous day. The market’s focus is now on second quarter U.S. gross domestic product data due at 1230 GMT.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Editing by Toby Davis)