The Swiss franc jumped sharply on Wednesday as fresh steps by the Swiss National Bank to stem the currency's gains disappointed a market positioned for more radical measures.
The SNB said it would boost liquidity by expanding sight deposits to 200 billion francs from 120 billion, reiterating it would take additional steps if needed, which market players said could mean direct intervention or setting a floor on the euro/Swissie exchange rate.
"There is disappointment in the lack of a strong commitment to measures that would stand in the way of a strong Swiss franc," said Michael Sneyd, currency strategist at Societe Generale.
The euro tumbled more than 2 percent against the franc in volatile trade to hit a low of 1.12248 francs on EBS trading platform as safe-haven demand for the Swiss currency resumed.
Earlier, the euro had strengthened past 1.15 francs for the first time this month as talk the Swiss might introduce a lower target level against the single currency left traders wary of betting against such a move.
Spot traders reported abnormally wide spreads being quoted in the franc while in the options market, overnight implied volatility continued to trade at extreme levels of over 50 percent on jitters over the potential for more SNB action.
SocGen's Sneyd said investors would be aware that more measures could be announced later this week or over the weekend.
The Swiss cabinet may hold a press conference following a meeting later on Wednesday, or possibly on Thursday, to discuss the impact the strong currency is having.
"The Swiss franc will very much remain a favored currency because of ongoing concerns about the euro zone debt crisis and it will be a battle between those who want to buy Swiss francs and the authorities who want to stem its gains," Sneyd said.
The euro was last down 0.6 percent at 1.1400 francs, still comfortably away from its record low of 1.0075 hit just over a week ago. The dollar was down 0.9 percent at 0.7890 francs.
EURO ZONE WORRIES
Lena Komileva, global head of G10 currency strategy at Brown Brothers Harriman, said the SNB's measures were "inadequate in an environment where investors are seeking safe havens," adding: "This will invite more speculative flows into the Swiss franc."
Demand for safe-haven assets was expected to continue as concerns remain about a weakening global economy and the lack of a clear solution to the euro zone debt crisis. This also kept the yen firm, with the dollar down 0.35 percent at 76.50 yen, near a record low of 76.25 yen.
French and German plans for closer fiscal integration failed to convince investors that leaders had gone far enough to tackle the spreading debt crisis, weighing on sentiment towards the euro.
But traders said Middle East demand helped lift the euro 0.3 percent against the dollar to $1.4453, off a session low around $1.4324.
A move back below support at its 100-day moving average around $1.4356 and the 55-day moving average at $1.4330 could leave the euro open to a test of last week's low just above $1.41.
Traders said a large $1.40/1.47 double-no-touch range bet may well serve to keep the euro restricted against the dollar, at least until the structure is said to expire around the middle of next week.
France and Germany unveiled plans on Tuesday for closer euro zone integration, including deficit limits and biannual summits and said that joint euro zone bonds may be a longer-term option.
Many experts believe the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint bonds.
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