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(Bloomberg) -- The euro is shaping up as the biggest casualty of Switzerland’s decision to scrap its currency cap.

Soon after the Swiss National Bank unexpectedly decided yesterday to end its three-year policy of keeping the franc from appreciating beyond 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc, the euro also plunged 3.5 percent against a basket of 10 developed-nation peers, the most since its 1999 debut.

The move by the SNB removes a key pillar of support for the euro, boosting the odds that its recent slide accelerates. Firms from Goldman Sachs Group Inc. to Pacific Investment Management Co., the world’s biggest manager of active bond funds, have in recent days talked about the increasing chance that the euro falls to parity with the dollar, which would represent a 14 drop from yesterday’s levels.

“It adds fuel to the fire,” Atul Lele, the chief investment officer of Deltec International Group, who manages $1.9 billion, said by phone from Nassau, Bahamas. “This move out of Switzerland certainly exacerbates the trade-weighted euro weakness that we expect to see.”

Options Jump

The difference in the cost of options to sell Europe’s common currency against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday. The euro dropped 1.3 percent to $1.1633 yesterday in New York, after falling as low as $1.1568, its weakest level since November 2003.

In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($202 billion) since September 2011. Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers.

The euro also sank below parity with the franc yesterday and on to an all-time low of 85.17 centimes, before recovering to 97.55. Deltec’s Lele said he sees it falling an additional 5 percent to 10 percent.

“The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end. When one of the biggest buyers of euros “leaves the building,” losses are inevitable, he said.

Risk Reversals

Options traders appear to agree. The premium on three-month contracts to sell the euro versus the dollar, over those to buy, rose 0.4 percentage point yesterday to 1.7 percentage points, 25-delta risk-reversal prices compiled by Bloomberg show.

That’s the biggest one-day increase since February 2013 and takes the cost premium to the highest since September 2013, on the basis of closing prices.

The euro’s decline against the basket of its peers, tracked by Bloomberg Correlation-Weighted Indexes, underlines the unprecedented nature of Thursday’s moves across financial markets.

The shared currency’s next-biggest daily decline was a drop of 1.6 percent on Jan. 5, 2009, when the dollar surged as details emerged of a U.S. fiscal stimulus plan to tackle the global financial crisis. The franc jumped 21 percent against the basket yesterday after policy makers removed the euro cap.

‘Big Pressure’

“When I saw the news, the first thought was how far can the franc go, and then what does this mean for other assets?” Chris Morrison, the London-based head of strategy at the Omni Macro Fund, which oversees $550 million, said by phone. “We see big pressure on the euro crosses.”

Goldman Sachs brought its forecast for the euro to fall to parity with the greenback forward a year to 2016 last week, citing expectations that the ECB will announce government-bond purchases, or quantitative easing, as part of its efforts to stave off deflation.

Pacific Investment Management Co., or Pimco, joined the chorus this week, while ING Groep NV, the most-accurate currency forecaster in 2014 in Bloomberg’s rankings, predicts a slide to $1 within two years.

The SNB capped the franc’s value in 2011 as the European debt crisis prompted an exodus from euro-denominated assets. The cap weathered the conflict in Ukraine and years of extraordinary stimulus from the ECB that boosted investor demand for the franc as a haven.

Backstop Gone

The over-valuation of the franc decreased since the limit was introduced, meaning it’s no longer necessary, Switzerland’s central bank said in a statement. Some strategists said the nation simply decided it no longer wanted to spend billions of dollars defending the limit, particularly with the ECB about to flood markets with euros.

The SNB’s euro holdings climbed 95 percent from when the cap was implemented to the third quarter of last year, according to the most recent data. It accounted for 45 percent of its total reserves.

Since September, the central bank’s total foreign-currency reserves jumped 7 percent to 495.1 billion francs ($563 billion), suggesting it may actually own more euros now after stepping up intervention to defend the cap in recent weeks.

“The central tendency will be for a weaker euro -- what’s to stop it?” Greg Peters, managing director and senior investment officer at Prudential Financial Inc.’s fixed-income division, which oversees $534 billion in bonds, said by phone Jan. 15 from Newark, New Jersey. “The SNB is out of the game as one of those backstops. It’s gone.”

--With assistance from Rachel Evans in New York.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lananh Nguyen in New York at lnguyen35@bloomberg.net To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Paul Armstrong, Robert Burgess

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