ZURICH: The Swiss franc lost ground against the euro and dollar on Wednesday on speculation that the Swiss National Bank might set a new exchange rate cap against the euro.
The franc fell 0.3 percent against the euro to trade at 1.2275 francs per euro by 0707 GMT compared to the New York close. It weakened 0.5 percent against the dollar, trading at 0.9213.
Last month, the Swiss National Bank took the radical step of setting an exchange rate cap of 1.20 francs per euro to tame the runaway currency, which is a headache for Swiss exporters and the tourism sector.
Low inflation, a large amount of forex swaps outstanding and an expected monetary easing by the European Central Bank could pave the way for the SNB to go for a new exchange rate target, UBS economist Reto Huenerwadel said.
But he cautioned defending a higher exchange rate target could prove tricky due to Switzerland's relatively strong economic fundamentals.
Switzerland emerged relatively unscathed from the last financial crisis but there are signs that the strong franc is starting to take its toll, with leading indicators pointing towards a significant economic slowdown in coming months.
Analysts at the cantonal bank of St. Gallen said the franc could weaken in the coming weeks.
"We see a short-term downwards correction towards the area below 1.2200 in euro-franc. Levels below 1.20 should no longer occur thanks to the SNB, so mid-term advances to 1.25 are possible," they said in a note.
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