By Patrick Graham
LONDON (Reuters) - The Swiss franc's fall to its weakest since the collapse of an official cap in 2015 dominated major currency markets on Thursday, and the dollar recovered from a fall to 2-1/2 year lows.
The franc, held largely steady for the past two years between capital seeking the security of Switzerland and a campaign of official intervention against the currency, had already fallen almost 2 percent this week.
It sank by as much as another 1 percent against the dollar and the euro in morning trade in Europe, while other major currency pairs were broadly steady.
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"The safe haven trade for the Swiss franc is starting to unwind," said Michael Hewson, chief markets strategist at CMC Markets in London.
By 1020 GMT, the franc had steadied a little to trade 0.6 percent weaker at 1.1231 francs per euro <EURCHF=EBS>. It lost 0.9 percent to 0.9587 francs per dollar.
Analysts said the main trigger was the change in the outlook for global monetary policy, which has seen expectations of tighter financial conditions - and relatively higher market interest rates - in the euro zone grow.
"Upside pressure on the franc will diminish as we see higher euro rates," said Commerzbank analyst Antje Praefcke.
The U.S. Federal Reserve drove the dollar lower on Wednesday with a policy statement that stuck to its promises on tightening but mentioned weakness in U.S. inflation more explicitly than before.
That played into doubts among international investors over U.S. economic growth and extended a sporadic slide for the dollar index that dates back to early March. <.DXY>
Against the euro, it has fallen 13 percent from a peak hit in January, and 5 percent in the past four weeks, stirring concerns over how much more euro strength European Central Bank policymakers will be willing to allow without reacting.
By late morning in Europe, the dollar had gained 0.2 percent on the day at $1.1713 per euro, having hit a low of $1.1777 in Asian trading.
"The euro's seven-month surge ... to near the top of its three-year $1.0341-$1.1714 range has called into question our expectations for the pair to range-trade through year-end," Barclays said in a forecast update.
"(But) we continue to believe that the conditions for a euro breakout are not yet met."
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Saikat Chatterjee and Sujata Rao-Coverley; Editing by Jon Boyle)