Emerging FX-Slovak ERM-2 move fuels c.Europe buying

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LONDON, March 19 (Reuters) - Central European currencies jumped on Monday on the back of a 3 percent surge by the Slovak crown after revaluation of its parity in the pre-euro exchange rate grid, as well as a general revival of global risk appetite.

The Slovak crown hit a fresh record high around 32.800 per euro, after the European Commission's approval late on Friday to revalue the currency's parity in the exchange rate mechanism ERM-2 by 8.5 percent.

ERM-2 is a precursor to euro adoption.

The Hungarian forint surged 1.8 percent to an 18-month high versus the euro to about 244.250 as the Slovak move fuelled speculation that Budapest is on the verge of abandoning its forint trading band.

The forint is now within touching distance of 240.1 per euro, which is the lower end of Hungary's self-imposed band.

The Polish zloty and the Czech crown also firmed, albeit to a lesser degree. Analysts said the Slovak move had been widely predicted though it had come earlier than most had expected.

"From a bigger picture perspective the revaluation has bigger, more significant implications for Hungary than for Slovakia," said Tania Kotsos, currency strategist at Royal Bank of Canada. "It's really emboldened our view that Hungary will abandon its trading band. It's now a question of when, not if."

Kotsos said Hungary's central bank, faced with rising inflation, may favour abandoning the band rather than raising interest rates further.

The zloty firmed 0.6 percent to 3.87 per euro to a 10-day high while the Czech crown touched two-month highs of 27.680 per euro .

Traders reported across the board buying of central European currencies but the momentum slowed somewhat after the Slovak central bank signalled it would not permit further appreciation.

"People were not expecting the Slovaks to move so soon and some people got caught short over the weekend," a trader in London said. "Slovakia has brought the idea of what Hungary may do ... if you are short forint, you would be nervous and you would be buying forint."

The gains in central Europe come against a backdrop of a general improvement in risk appetite across the globe, with a rebound in global equities and renewed yen weakness soothing some of the recent worries about the carry trade.

Stock markets in Asia shrugged off the 0.27 percent weekend rate increase in China, while the yen fell versus the dollar.

Shares from Warsaw to Johannesburg also firmed, with emerging equities on the MSCI index up to almost a week-high.

"The moves we see in central Europe are also due to a bit of a ripple effect. The carry trade seems a bit more popular today," the trader said.

But most players believe the recovery is tentative and focus will be on the Bank of Japan and the U.S. Federal Reserve, both of which meet this week. Neither is expected to raise rates but attention will be paid to post-meeting statements.

Worries persist about the health of the U.S. economy and how it may be impacted by the subprime mortgage crisis.

"We are seeing a cautious return of risk appetite but FX volatility and equity volatility remain elevated. Investors will remain nervous and quick to take profits," Kotsos of RBC warned.

The Turkish lira firmed half a percent to 1.40 per dollar to a three-week high while the South African rand was flat around 7.45 per dollar .