Czech crown extends gains to near 2-month highs

...and growing market confidence that the economy was sustaining a robust pace of expansion.

The crown rose a third of one percent to 28.035 per euro by 1500 GMT, extending its gains into a third consecutive session.

It earlier hit a high of 28.015, a level unseen since late January, leaving the narrow trading range of between 28.100 and 28.300 that it has hugged since the start of this month.

"U.S. investment houses have been selling euros for crowns for several days," said one dealer with a major international bank in Prague.

"It is highly likely the market will test the 28.000 level, but at the moment it seems any further gains could give an opportunity to enter a new long euro/czech position," he added.

Economic data published late last week and this week were also supportive of the currency, showing a robust pace of expansion led by domestic demand growth, which analysts believe will spark an interest rate increase later this year.

Double-digit rises in car and electronics production propelled industrial output growth to 9.8 percent year-on-year in January [ID:nL13408467], data showed on Tuesday.

Analysts said Wednesday's release of an unexpected surplus of 5.5 billion crowns ($256.9 million) in the current account in January also spoke in the crown's favour [ID:nL14858775]. "The current account outlook has not changed significantly, as we see a re-acceleration of profit repatriation in the spring, although the figures are short term supportive for the currency," said Istvan Zsoldos at Goldman Sachs in London.

Low official interest rates, at 2.50 percent the lowest in the European Union and a record 125 basis points below euro zone equivalents, have weighed on the crown in recent months, turning it into a funding currency for regional investments.

But the crown benefits from a rise in risk aversion, with the unwinding of crown-funded positions in higher-yielding but riskier currencies leads to its firming.

----------------- MARKET SNAPSHOT AT 1500 GMT ----------------- Crown/euro last deals at 28.032 (+0.30 pct) Crown/dollar at 21.164 bid (+0.47 pct)

5-year yield due Oct 2010 3.32 pct bid (flat) 10-year yield due Jan 2016 3.78 pct bid (2 bps)

5-yr CZK/EUR mid yield spread -59 bps (vs -56) 10-yr CZK/EUR mid yield spread -11 bps (vs -12)

Current levels versus prior domestic close at 1500 GMT ---------------------------------------------------------------