SYDNEY Thu Jan 15, 2015 6:10pm EST
The euro hovered above an 11-year trough early on Friday as investors wagered the Swiss move to abandon its currency cap meant it was almost certain the European Central Bank would launch large-scale bond buying next week.
The euro suffered its biggest one-day drop against the Swiss franc in history after the Swiss National Bank (SNB) stunned markets by suddenly abandoning its long-held pledge to keep the franc above 1.20 per euro.
After falling 30 percent in a matter of minutes, the euro has since clawed back to 0.9828 Swiss francs EURCHF=R, but that still left it down 19 percent.
The loss of Swiss support for the euro saw the single currency slide across the board to reach as low as $1.15675 EUR=, a trough not seen since November 2003, before recovering a bit of ground to last stand at $1.1636.
Dealers assumed the Swiss had moved with the knowledge that the ECB would take the plunge into full scale quantitative easing at its policy meeting on Jan. 22.
"No doubt the market will be expecting big stimulatory action from the ECB next week if the Swiss fear a much weaker euro," said David de Garis, senior economist at National Australia Bank.
"In fact, the move unleashed a spate of currency volatility, including the euro, major currency pairs whipsawing significantly."
Indeed, the franc also soared 18 percent against the greenback, which last traded at 0.8650 francs CHF=, having fallen as far as 0.7360.
The euro was hammered against the other major currencies. It fell to a three-month low of 135.00 yen EURJPY=R and hit a four-month low of A$1.4152 EURAUD=R.
Dealers suspected many banks, hedge funds and day traders would be nursing painful losses from the surge in the franc which could lead to sales of other currencies and assets to cover their positions - and thus more volatility.
With the euro under pressure, the dollar index .DXY reached an 11-year high of 92.752. It last stood at 92.203.
Traders said the ECB bond-buying program would inject fresh euros into the market, some of which would ultimately flow into the safe-haven Swiss franc.
That would render the task of maintaining the 1.20 per euro cap all the more difficult and expensive for the SNB, hence its decision to abandon the pledge.
Still, the market reaction was nothing short of panic and that helped lift the safe-haven Japanese currency broadly.
The dollar hit a fresh one-month low of 115.90 yen JPY=, while the Australian dollar dipped to 95.35 yen AUDJPY=R from Thursday's high near 97.00.
Amid the frenzied trade, the Aussie managed to reach a one-month high of $0.8295 AUD=D4 only to fall back to $0.8186 in early Asian hours.
There is nothing in the way of market-moving data out in Asia, giving the market room to digest the SNB's announcement.