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Swiss franc races to 2-year highs vs euro as trade worries rise

London

THE Swiss franc rallied to its highest levels in nearly two years against the euro on Monday as US President Donald Trump hardened his trade stance to countries beyond China, prompting investors to move into perceived safe-haven currencies.

Trade tensions have grabbed centre stage for investors in recent weeks after Mr Trump increased tariffs on Chinese imports, threatened to raise tariffs on Mexican imports and removed preferential trade treatment for India.

Rising strains on trade have prompted investors to dump risky assets such as equities and flock to low-yielding currencies such as the yen and the franc with the latter flirting close to levels where the Swiss National Bank has traditionally intervened to keep the currency weak.

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"While the Swiss franc has appreciated strongly in recent weeks, much of that gain is due to the wave of risk aversion sweeping across markets and we need to see further substantial gains before the central bank has to step in," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Against the euro, the franc rallied more than half a per cent to 1.1120 francs per euro, its highest level since July 2017, before trimming some gains to stand 0.2 per cent up on the day. Monday's gains come on top of a strong surge in May when the franc gained more than 2 per cent versus the euro, its biggest monthly rise in eight months as trade tensions fuelled a global selloff in risky assets.

The Swiss National Bank, which pursues a monetary policy of negative interest rates and currency intervention, has traditionally intervened when the franc has risen to around 1.10 francs per euro but low inflation and trade tensions suggest the franc has to gain far more from current levels.

Latest data indicate price pressures remain well contained with consumer prices rising 0.6 per cent in May from a year-ago period.

The franc wasn't the only low-yielding currency to shine, with the Japanese yen also broadly gaining against a swathe of currencies.

The euro was slightly firmer on the day at US$1.1185 but investors remained broadly cautious on the outlook of the single currency as manufacturing data in the eurozone contracted for a fourth month in July.

The weak data comes in a busy week for European Central Bank policymakers as officials may announce details of a new round of cheap multi-year loans for banks.

Meanwhile, expectations of a rate cut have also grown in money markets with futures pricing in a 50 per cent chance of a rate cut before the end of the year.

"With a dovish ECB expected, it is challenging to envision strong gains now for the euro," said Marc Chandler, chief market strategist at Bannockburn Global Forex. REUTERS