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UPDATE 1-Swiss FX reserves post sharpest rise on record in May

* FX reserves up 78.8 bln Sfr, steepest rise on SNB records

* Rise due to SNB FX interventions

* Extra liquidity poses potential inflation risk

(adds details, analyst comment, background)

ZURICH, June 8 (Reuters) - Switzerland’s currency reserves posted their sharpest rise on record in May, highlighting the deepening dilemma for the Swiss National Bank, whose massive currency interventions add liquidity despite the economic recovery.

The overall currency reserves rose by 78.8 billion Swiss francs to 232.4 billion francs ($200.7 billion) in May, surpassing by far the 28.7 billion rise in April, the website of the Federal Statistics Office showed on Tuesday.

“These are official figures,” SNB spokesman Nicholas Haymoz said, declining to comment further on the data.

The increase was the highest on records available on the SNB’s website, which start in mid-1999.(www.snb.ch)

The Swiss franc soared to a new all-time high at 1.3784 against the euroEURCHF= on Tuesday as the market tested the SNB's resolve to prevent excessive gains in the currency. By 1054 GMT, the euro-franc was trading at 1.3819.

The SNB started buying euros against francs in March 2009 as part of its fight against deflation and the central bank’s currency reserves have increased nearly five-fold since then.

SNB officials have so far stuck to the central bank’s stance, saying the SNB was still committed to preventing too sharp a rise in the franc.

The central bank will give an update on its currency strategy in its quarterly monetary policy assessment on June 17. Analysts also expect details on the SNB’s plan to deal with the huge amount of liquidity added through the interventions.

“There are rumours that the SNB could allow for more appreciation (of the Swiss franc vs the euro) and that is what we have seen in the exchange rate,” Fabian Heller, an analyst at Credit Suisse, said.

“Just from the exchange rate, it seems that the SNB has changed its forex strategy. In June, they probably won’t spend as much on euros as they have in May,” he added.

"At the moment, liquidity is very high. This is reflected strongly in the 3-months Swiss franc LiborCHF3MFSR=, which has dropped to a record low," Heller said.

The 3-month LIBOR was fixed at 0.08 percent on Tuesday, slightly above its all-time low of 0.07667 hit on Monday but well below the SNB’s official target of 0.25 percent.

Reporting by Silke Koltrowitz; Editing by Ruth Pitchford

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