The dollar rose to a seven-year high against the Japanese yen on Wednesday after a victory by Republicans in the United States' mid-term elections raised hopes for an easing of political gridlock in Washington, boosting sentiment for riskier assets.
The euro's struggles continued, though, a day ahead of a European Central Bank meeting, and it hit a two-year low against the Swiss franc. The euro fell to a low near 1.20 francs, not far from the Swiss central bank's floor of 1.20 francs imposed on Sept. 2011.
Swiss inflation data showed a growing threat of deflation, and that is likely to put pressure on the SNB to intervene in the currency market to weaken the franc.
With a referendum on Nov. 30 that is aimed at preventing the Swiss National Bank from offloading its gold holdings and obliging it to hold at least 20 percent of its assets in gold, speculators are likely to target the cap imposed by the SNB to prevent the Swiss franc from appreciating.
The SNB opposes the "Save our Swiss gold" initiative as it would significantly curb its ability to shape monetary policy. Sofar, polls indicate that the initiative is unlikely to get majority support.
"The currency pair is rapidly approaching levels at which SNB interventions might become necessary again," said Esther Reichelt,currency strategist at Commerzbank. "In the immediate run-up to the referendum on stricter rules for SNB gold reserves, that is likely to be a most unwelcome development for the SNB."
Against the dollar, the euro was down around $1.25 after a short-covering rally witnessed on Tuesday fizzled out. Therally was prompted by a Reuters report that quoted European Central Bank sources as saying colleagues of ECB president Mario Draghi were unhappy with his management style.
The ECB meets on Thursday and is expected to hold off on fresh policy action. But with the Bank of Japan surprisingly easing policy last week and pushing the yen sharply lower, the onus is on the ECB to take further easing measures in a bid to cheapen the euro and boost growth and inflation.