The Swiss franc hit a six-week high against sterling and rose as much as 1 percent against the dollar on Thursday following a series of explosions in London's transport system which killed a number of people. Police said several blasts hit the bus and underground rail network in the city. At least 90 casualties were reported in one underground blast.
British interior minister Charles Clarke said "there have been a number of terrorist attacks," while Prime Minister Tony Bair said the incident was an apparent terror attack coinciding with a meeting of Group of Eight leaders in Scotland.
"The market is showing a textbook reaction, buying safe-haven currencies like the Swiss franc and euro and away from the dollar," said Marios Maratheftis, currency strategist at Standard Chartered.
By 1150 GMT the Swiss franc has risen to the one-month high of 0.4458 against the pound. It rose more than 1 percent on the day to 1.2838 francs per US dollar, before paring gains to trade at 1.2910.
Sterling hit a one-month low of 68.92 pence per euro, while it sank to a fresh 19-month trough of $1.7403 against the dollar .
The pound trimmed losses after the Bank of England left interest rates at 4.75 percent.
"In a way it is a surprise because following today's events some people were saying the BoE might want to pre-empt any effect this could have on consumer spending," said Adarsh Sinha, currency strategist at Barclays Capital. "If this is confirmed as terrorist attacks it will hit consumer confidence and household spending, which in any way is deteriorating. The general outlook on UK interest rates is not great and an August interest rate cut is priced in anyway."
Sinha was speaking before Home Secretary (interior minister) Clarke said the explosions were terrorist attacks.
The euro surged past $1.20 before trimming gains to $1.1970. It showed little reaction to the European Central Bank's decision to leave interest rates unchanged at 2 percent.
After the incident London stocks fell 3.7 percent, their biggest fall since August 2002, dragging down other European shares.
German Finance Minister Hans Eichel said his counterparts from the Group of Seven rich nations are monitoring the reaction of financial markets to the London blasts but the global economy will not be knocked off track.
The BoE said it had not provided extra liquidity to markets after the blasts.
Leaders of the G8 powerful nations, meeting in Scotland this week, are expected to issue a statement on London attacks, according to a Canadian official.