LONDON: Sterling hit a seven-year high against a battered euro on Thursday after the Swiss National Bank's shock decision to scrap its three-year-old cap on the franc's value against the euro left currency investors reeling. The SNB has been a major buyer of euros and had stepped up its foreign exchange intervention in the past few weeks as it defended its 1.20-francs-per-euro cap in order to prevent the Swiss currency from appreciating.
But with the cap abandoned, a big support for the euro -- it has very few of those left -- has gone.
As the euro touched an 11-year low against the dollar , it fell to a seven-year trough versus the pound at 77.32 pence, leaving the single currency down 1.3 percent against sterling - its biggest daily fall in over a year. "A large buyer of the euro is now not buying any more," said Alvin Tan, a currency strategist at Societe Generale. "The SNB action helps the dollar, principally because it will create more pressure for the euro downwards, so it adds downside pressure on Cable (sterling/dollar)."
Tan said traders were speculating that the SNB knew that the European Central Bank was set to launch a quantitative easing programme at its policy meeting next week, and that this prospect was also acting as a drag on the euro. Sterling also sank to a three-year low against the Swiss franc, falling over 13 percent to 1.3244 francs per pound and last trading at 1.3530.
Against the dollar, which soared to an 11-year high against a basket of major currencies, the pound was trading down 0.5 percent at $1.5167. SocGen added that the SNB's action improves the outlook for sterling, especially against the euro, with the pound likely to see safe-haven flows into the UK despite the political uncertainty of the coming months. Traders said the pound was also still drawing support from expectations that the British economy would outperform its peers in the euro zone. But most investors are wary of adding bets on the pound against the dollar before a highly unpredictable general election in May, and many have started to protect themselves against violent price swings in the British currency over the coming months.
"Sterling remains a sell on any rallies in our view as political issues move into focus by spring," Jonathan Webb, head of FX strategy at Jefferies, said in a note. "Cracks in economic data would be a bonus to our bearish sterling view”.
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