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FOREX-Swedish crown drops to 1-1/2 year low vs firm euro

Anirban Nag
Thursday, 12 Dec 2013 | 7:47 AM ET

* Euro near 2013 peak against dollar, 5-year peak vs yen

* Swedish crown off as Riksbank cut seen certain after data

* Swiss franc recovers to hit 7-month high vs euro

LONDON, Dec 12 (Reuters) - Sweden's crown fell to a 1-1/2 year low against the euro on Thursday after data bolstered the case for a rate cut there and with the single currency supported by higher money market rates and year-end repatriation by banks.

Against the dollar, the euro was steady at $1.3785, having hit a six-week high of $1.3811 on Wednesday. It has gained nearly 4 percent since Nov. 11 and is close to its 2013 peak of $1.3833. The euro was up 0.3 percent at 141.60 yen and close to a five-year peak of 142.19 yen

The Swedish crown fell to its lowest since May 2012 at 9.0749 crowns per euro after inflation data showed falling price pressures with jobless numbers also painting a grim picture about the Swedish economy.

"The market is extrapolating the data will see some action from the Riksbank next week. This is driving down the crown," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

While more investors priced in a chance of a rate cut by the Riksbank, the euro was supported by rising short-term market rates, with inter-bank lending rates hitting near 16-month highs. They rose as prospects of near-term action from the European Central Bank to ease the crunch receded.

"The euro's rise towards two-year highs against the dollar is probably the path of least resistance," added Stretch. "There is nothing fundamental but year-end liquidity squeeze. Unless short term rates ease, we will see the euro remain bid."

Excess cash in the euro money market usually dwindles as year-end nears as banks refrain from lending to each other. European banks repatriating funds to shore up capital before an ECB asset quality review, to be based on balance sheets at the end of 2013 is also supporting the euro.

Highlighting this demand, 3-month eurodollar cross currency basis swaps have turned positive this week for the first time since 2008. In other words, euro zone banks are paying a premium to buy euros in exchange for dollars.

The euro showed little reaction to a drop in industrial production in the euro zone for October and ECB President Mario Draghi's comments on inflation and growth.

SWISS FRANC COOL TO SNB

The Swiss franc rose against the euro and the dollar, helped by year-end flows into safe-haven Switzerland. It shrugged off comments from the Swiss National Bank, which reiterated its commitment to the euro/franc peg of 1.20 euros.

The euro fell to a seven-month low of 1.2201 francs on EBS while the dollar edged towards a recent two-year low against the franc.

"Investors are concerned about the impact on risk appetite of Fed tapering and this could underpin the Swiss franc," said Jane Foley, senior currency strategist at Rabobank.

"Also, given the recent increase in disinflationary pressures in the euro zone, it seems likely that ECB interest rates will also remain at rock bottom for longer. This indicates that there is less reason for euro/Swiss to appreciate soon."

The dollar got little help from news that Congress has reached a bipartisan budget deal, seen as a potential hurdle for the Federal Reserve to taper its bond-buying programme.

It was flat on a basket of currencies at 79.914.