UPDATE 2-Slovak crown at record after ERM move; cbank warns

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By Peter Laca

BRATISLAVA, March 19 (Reuters) - The Slovak crown jumped by more than 3 percent to record highs against the euro on Monday after it was revalued within the ERM-2 currency grid, prompting the central bank to warn the market the latest rise was unjustified.

The crown quickly moved to 32.950 per euro in early trade, and later extended its gains to 32.850 before retreating to 33.020 at 0823 GMT after the central bank (NBS) said it was prepared to act to stop the currency's rise.

"The new parity level is close to the equilibrium exchange rate. Therefore, there is no reason for the crown to strengthen dramatically from there, and the exchange rate should move around that area," board member Karol Mrva told Reuters.

"If the firming continues, we are ready to use our tools, including interventions, if it is needed," he added.

Hungary's forint also surged on Monday after the late Friday announcement that the EU's executive Commission had approved a Slovak request to revalue the crown's central parity rate in the ERM-2, a precursor to euro adoption, by 8.5 percent. (For revaluation story, click on [ID:nL16153510])

The forint opened 1.7 percent stronger on Monday and was trading at 245.00 against the euro at 0757 GMT, slightly off an earlier high at 244.35, a level last hit in September 2005.

The Slovak crown's new parity rate of 35.4424 per euro was agreed by euro zone countries, the European Central Bank and other ERM-2 members.

The crown is allowed to move up and down 15 percent around this level in the grid, where countries must prove currency stability for at least two years before adopting the euro.

Mrva said the new parity "reflects developments in the economy since the entry to the ERM-2" and the morning jump was partly caused by overseas trading late on Sunday.

The parity shift followed a steady crown rise in the past few weeks, fuelled by Slovakia's booming economy, foreign direct investment deals and prospects of euro adoption in 2009.

"Parity revaluation opens more room for firming and it is therefore attracting new investors to crowns, who previously saw only limited room (within the old fluctuation band)," Slovenska Sporitelna analysts said in a market report.

The central bank had fought against the crown's climb in 2006 and this year, directly intervening in currency trading and flooding the money market with excess liquidity.

Analysts said the parity revaluation was a sign the NBS had now become more tolerant of a strong crown, which is helping it curb inflation to meet another condition for euro zone entry.

"We think the NBS will let the crown firm for now without interventions, and we also do not predict reduction in interest rates for the time being," Slovenska Sporitelna said.

Slovak Finance Minister Jan Pociatek and central bank Governor Ivan Sramko will hold a briefing on the ERM-2 parity change at 9.30 a.m. (0830 GMT).