LONDON: Sterling hit a seven-year high against a struggling euro on Thursday after the Swiss National Bank surprised investors by abandoning its three-year-old cap on the franc's value against the euro, sending a shockwave through major currency markets.
The SNB has been a big buyer of the euro, having stepped up its intervention in the past few weeks to defend the cap at 1.20 franc per euro and prevent the Swiss franc from appreciating.
With the cap abandoned, a big support for the euro has gone, pushing the single currency to its lowest in 11 years against the dollar and a seven-year low against the pound.
Sterling also fell to a three-year low against the Swiss franc. The franc rose over 13 percent to 1.3311 francs per sterling and was last trading at 1.3395.
"This (SNB action) accelerates the euro/dollar downtrend," said Kit Juckes, head of currency strategy at Societe Generale.
"It may also improve the outlook for sterling, extending euro/sterling weakness, if safe-haven flows into the UK are re-invigorated despite the political uncertainty of the coming months."
The euro was down 0.9 percent at 76.70 pence, having dropped to 76.48 pence, its lowest since early 2008. The single currency has lost 4.3 percent in the past three months and chartists say it on the verge of dropping to lows of 74.50 pence.
The euro was already under pressure as expectations grew in recent weeks that the European Central Bank would embark soon on outright government bond buying.
Traders said the pound was also still drawing support from expectations that the British economy would outperform its peers in Europe. With inflation subdued and growth slowing, investors have pushed back when they expect the Bank of England to raise interest rates. But the UK's prospects still contrast with the threat of deflation facing the euro zone.
Sterling was slightly higher at $1.5252 against the dollar.
But most investors are wary of adding bets on the pound, especially against the dollar, before a general election in May. The election is likely to be the most uncertain in modern times and may lead to another fractious coalition government - and to a referendum on Britain's membership of the European Union.
"Sterling remains a sell on any rallies in our view as political issues move into focus by spring," said Jonathan Webb, head of FX strategy at Jefferies in a note. "Cracks in economic data would be a bonus to our bearish sterling view."
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