LONDON, March 16 (Reuters) - The euro and Swiss franc regained some lost ground on Thursday, as markets reacted positively to the Swiss central bank extending support to Credit Suisse, ahead of a difficult meeting for European Central Bank rate setters.
The euro was up 0.28% at $1.0608. On Wednesday it had lost 1.4% - its biggest percentage fall in six months - as the focus of fears about the banking sector spread from the collapsed U.S.-based Silicon Valley Bank to the much larger Credit Suisse.
Some calm was restored to markets after the Swiss lender (CSGN.S) said it would borrow up to $54 billion from the Swiss National Bank to shore up liquidity and investor confidence after the bank's shares plunged as much as 30% on Wednesday.
That helped the Swiss franc to strengthen, and the dollar at one point fell more than 1% against the franc , to 0.9232, reversing some of its 2.15% surge on Wednesday - the largest daily gain since 2015.
Paul Jackson, global head of asset allocation research at Invesco, said the nature of the banking system, such as its interconnectedness, meant that any troubles in the sector made investors particularly nervous.
"It’s like walking through a forest at night, and if you’re nervous and you hear a sound, which could be a squirrel or it could be a bear, you react as if it’s a bear.”
But news of the Swiss National Bank's support for Credit Suisse calmed the mood, and some said they expected to hear reassuring comments from the European Central Bank later on Thursday.
"We already saw a recovery since the SNB stepped in to offer its reassurances. I presume that we'll continue to hear more reassurances about the safety of the banking system and I would expect that would come through with the ECB," said Joel Kruger, Market Strategist, LMAX Group.
ECB IN FOCUS
In what would have been the day's main event before the banking sector ructions, the ECB meets to set interest rates on Thursday, with its decision due out at 2.15 p.m. CET (1315 GMT).
The central bank had all but committed to a 50 basis-point hike at this meeting after its previous meeting. The latest market turmoil has led to some doubt over those expectations.
"If recent inflation data clearly underpinned the ECB’s pledge to hike rates by 50bp in March, the ongoing turmoil in the financial sector is casting doubts on whether policymakers will raise rates at all," said Francesco Pesole FX strategist at ING.
Pricing in derivatives markets currently indicates a little more than a 50% chance of a 50 basis-point hike, an increase from earlier in the week.
Pesole said it was also unclear how the euro would react to the ECB's decision.
"If the ECB 50bp hike comes in an environment where markets are scaling back concerns on the banking sector thanks to the support from the SNB, then this may actually be read as a signal of confidence by Frankfurt on the health of the euro zone banking system, and can ultimately lift the euro," Pesole said.
"Should the ECB force a hike in a still fragile environment for the European banking sector, the impact on EUR/USD may actually be negative, as investors see this as another major risk for the financial stability in the area."
Elsewhere, the safe-haven Japanese yen remained in favour even as markets calmed a little.
The dollar was last down 0.69% against the yen at 132.5, a near 4% slide from the U.S. currency's near three-month high hit on March 8 before markets entered their tailspin.
Sterling was steady at $1.20415, and the dollar index, which tracks the unit against six main peers, was down 0.2% at 104.45.
