* Euro/Swiss rises on Swiss government franc measures
* Sterling slides on BOE inflation report
* Euro treads familiar range versus dollar
(Recasts, adds quote, updates prices)
By Neal Armstrong
LONDON, Feb 16 (Reuters) - The euro rose against the Swiss
franc on Wednesday after the Swiss government announced steps to
deal with a strong franc, while sterling fell as the Bank of
England dampened hawkish interest rate expectations.
Sterling <GBP=D4> fell to the day's low of $1.6040, compared
with around $1.6140 before the Bank of England's quarterly
report on inflation was released. It also lost ground against
the euro, with the common currency rising to a session high of
84.29 pence <EURGBP=D4> from 83.85 pence.
The euro also rose against the Swiss franc <EURCHF=>,
jumping 85 pips to 1.3130 francs in a knee-jerk reaction after
the Swiss government said it was taking measures to deal with a
strong currency by providing support to exporters. The single
currency later pulled back to 1.3070 francs. []
"The Swiss government has been making noises about franc
strength, but they have a difficult balancing act," said Jeremy
Stretch, currency strategist at CIBC.
"Many areas of the Swiss economy are under pressure due to
the strong currency but they must be careful not to tread on the
toes of the Swiss National Bank."
The government also said that any monetary steps were the
responsibility of the Swiss National Bank.
The euro was up 0.2 percent against the dollar at $1.3510
<EUR=>, helped by buying from an Asian sovereign, and supported
above $1.3483, the 38.2 percent retracement of the January to
February rally.
The euro also drew some support from Portugal's smooth
buyback of bonds, although worries about when policymakers will
find a durable solution to the euro zone's year-long sovereign
debt problems remain in play.
That is likely to keep the common currency rangebound.
"One suspects that some large speculative players are
positioned with double no-touch options, collecting a pay-out
should the euro never hit $1.33-$1.38 over the next month," said
Chris Turner, head of FX strategy at ING.
STERLING SLIDES
Sterling fell sharply as investors revised expectations for
a rate rise after the BoE downgraded its economic growth
forecast in its quarterly inflation report, even as consumer
prices spiked higher. The central bank predicted a bumpy ride
for the economy this year, with its 2011 forecasts for growth
lower than in predictions made in November. []
That kept alive risks of stagflation. Implied rates based on
interest rate futures <BOEWATCH> are now fully pricing the
chance of a quarter point rate hike only in June, pushing it
back after pricing in a rise in May over recent weeks.
"There were hedge funds and a lot of investors who were
piling on sterling based on interest rate expectations," said
Adam Myers, currency strategist at Credit Agricole CIB.
"Sterling has now sold off, reacting to those expectations
in the rates market."
The dollar index <.DXY> was steady at 78.529 as markets
awaited the release of policy minutes from the Federal Open
Market Committee meeting held at the end of January. January
housing starts and producer price data would also give investors
an idea about how the U.S. economy is performing.
The greenback held its ground against the yen, supported by
firm U.S. Treasury yields, and was set to test the ceiling of a
long-held range.
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The dollar traded steady at 83.75 yen <JPY=>, near its
eight-week high of 83.93 yen marked on Tuesday. The two-year
Treasury yield <US2YT=RR> hit a nine-month high near 0.9 percent
on Tuesday, but has since retreated.
Its correlation with dollar/yen broke down late last year
but was showing signs of re-establishing itself. The currency
pair's one-month correlation with the U.S. two-year yield has
risen to around 0.43 percent from negative territory earlier
this month.
(Additional reporting by Anirban Nag)
(Editing by Susan Fenton)
