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Swiss Franc Advances as SNB Says Deflation Risk has Disappeared

June 25 (Bloomberg) -- The Swiss franc strengthened to a record against the euro after the central bank reiterated that the risk of deflation has largely disappeared, fueling speculation it will stop resisting gains in the currency.

Switzerland’s currency rose for a fourth day versus the U.S. dollar. The Swiss economy will grow faster this year than previously anticipated as consumers increase spending and a global recovery fuels exports, the country’s BAK economic institute said. The Swiss National Bank said today in its quarterly bulletin that it would take necessary measures to ensure price stability should the sovereign debt crisis in the euro area “lead to a renewed threat of deflation.”

The franc appreciated as much as 0.77 percent to 1.3491 against the euro as of 3:08 p.m. in London, the strongest level since the euro’s 1999 debt. That pushed its gains this year so to 9.8 percent. Against the dollar, the Swiss currency gained 0.4 percent to 1.0987.

“This basically means as long as the franc doesn’t overshoot, they won’t intervene,” said Marcus Hettinger, a strategist at Credit Suisse Group AG in Zurich. Demand for francs may also increase as investors bet “that interest rate differentials will narrow,” Hettinger said.

The Zurich-based SNB started selling the franc in March 2009 to ward off deflation and revive the economy amid the worst global financial crisis since World War II. Pressure on the currency to appreciate increased as the euro tumbled on concern that countries from Greece to Portugal would default on their debt and lead to the collapse of the shared currency.

Gross domestic product may rise 1.9 percent this year and 1.7 percent in 2011, the Basel, Switzerland-based institute said in the statement on its website. It previously forecast the economy to grow 1.2 percent in 2010.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net

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