Nov. 20 (Bloomberg) -- The Swiss franc dropped to the lowest level against the dollar since August 2007 after the central bank unexpectedly cut its key interest rate.

The franc also slipped versus the euro after the Swiss National Bank reduced its benchmark three-month Libor target rate by 1 percentage point to between 0.5 percent and 1.5 percent today after an unscheduled meeting. It said it would provide a ``generous and flexible supply of liquidity'' to meet the target.

``The reaction was rather muted considering the timing and depth of the cut,'' said Marcus Hettinger, a currency strategist in Zurich at Credit Suisse Group, Switzerland's second-largest bank. ``Rates cuts were expected later this year.''

The franc declined 0.4 percent to 1.2189 per dollar by 3:11 p.m. in Zurich, from 1.2138 yesterday. It dropped 0.6 percent to 1.5260 per euro, from 1.5165.

``We expected 150 basis points to be cut over the next 12 months and that's 100 of it,'' said Hettinger. ``The franc will strengthen to 1.50 per euro in coming months.''

Zurich-based policy makers reduced the benchmark rate for a third time since the beginning of October, bringing it to the same level as the Federal Reserve's target rate, and its lowest since March 2006. The European Central Bank's main refinancing is at 3.25 percent.

``International economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity,'' the SNB said in a statement accompanying today's decision. ``As a result of the drop in the prices of raw materials and oil, price stability will be restored sooner than expected, and inflation is likely to fall below 2 percent by year-end.''

Export Pressures

Policy makers will continue to monitor money and foreign- exchange markets, ``likely alluding to the sharp drop in the euro-franc rate during October's risk-aversion episodes, which would seriously damage the export-dependent economy,'' UBS AG currency strategists, led by Zurich-based Mansoor Mohi-uddin, wrote in a note to clients.

Swiss exports fell in October as a global economic slowdown eroded demand for machines, chemicals and metals, a government report today showed.

Exports may weaken further in coming months as some of Switzerland's main trading partners such as Germany and the U.K. face shrinking economic growth. At the same time, an 8.3 percent gain in the franc against the euro this year is making Swiss products less competitive in their biggest export market.

Europe's economy slid into its first recession in 15 years in the third quarter, prompting the ECB to cut rates and governments to line up fiscal-stimulus packages.

To contact the reporter on this story: Matthew Brown in London on mbrown42@bloomberg.net

Last Updated: November 20, 2008 09:16 EST