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FOREX-Interest rate cut shocks Swiss franc lower

* Swiss franc hits 28-month low vs dollar after rate cut

* SNB confirms has intervened in FX markets

* Fed says will be patient in raising rates

By Jemima Kelly

LONDON, Dec 18 (Reuters) – The Swiss franc hit a 28-month trough against the dollar and also fell against the euro on Thursday after the Swiss National Bank said it would introduce negative interest rates to stop further currency appreciation.

In a surprise statement, the SNB said it would impose an interest rate of -0.25 percent on some large deposits held by investors in Swiss francs, as it seeks to discourage buying of the currency as a safe haven.

SNB Chairman Thomas Jordan also confirmed on Thursday that the bank had intervened in foreign exchange markets, in another effort to defend the central bank’s three-year-old cap of 1.20 francs per euro.

An unfolding financial crisis in Russia and the continued slide in oil prices have rocked global markets, fuelling demand for assets like the franc used by investors as a refuge from economic and market turmoil.

The franc weakened to as much as 1.2098 per euro before paring losses to trade at 1.20425, down 0.3 percent and on track for its biggest daily fall in nine months.

Against the dollar, the franc fell to 0.9848 francs, a level not seen since August 2012, before recovering to 0.97865 francs, down 0.6 percent on the day.

Stephen Gallo, European head of FX strategy at BMO Capital Markets in London, said the 25 basis point rate cut would not necessarily be enough to deter flows into the Swiss currency in the long run.

“What the SNB decision does is put Switzerland back to neutral,” he said. “It’s a relatively small cost for capital preservation.”

The negative rate will come into force on Jan. 22, the day of the next European Central Bank policy meeting, when many are speculating that more aggressive monetary easing will be introduced in the euro zone.

“This is basically a way for them (the SNB) to ease monetary conditions to try to counter the fact that their biggest trading partner is expected to make a significant easing move through quantitative easing,” said Anthony Lawler, a portfolio manager in London at GAM, which invests some $ 25 billion in hedge funds.

The euro fell below $ 1.23 after the SNB’s move, a sign investors may be calculating that the SNB will want to diversify some of its huge euro-denominated currency reserves amassed over the last few years into dollars, according to Geoffrey Yu, a currency strategist at UBS in London.

The single currency was last trading at $ 1.23005, down 0.3 percent on the day.

The dollar was largely steady after the Federal Reserve signalled it was on track to raise interest rates next year, tweaking a pledge to keep them near zero for a “considerable time” in a show of confidence in the U.S. economy.

(Reporting by Jemima Kelly and Jamie McGeever; Additional reporting by Hideyuki Sano and Tomo Uetake in Tokyo; Editing by Susan Fenton and Crispian Balmer)

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