UPDATE 3-Slovak crown at record after peg 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, and the central bank said the latest rise was unjustified.

Other central European currencies also firmed after the announcement last on Friday that the crown's peg in the grid, the precursor to euro adoption, had been strengthened by 8.5 percent to 35.4424 per euro, with the consent of euro zone countries, the European Central Bank and other ERM-2 members.

The crown quickly moved to 32.950 per euro in early trade, and had extended its gains to 32.80 by 0935 GMT.

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.

"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.

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 self-imposed trading band.

The Polish zloty and the Czech crown also firmed, albeit to a lesser degree, while the Romanian leu approached January's four-year highs. Analysts said the Slovak move had been widely predicted though it had come earlier than most had expected.

(For emerging market FX report, click on [ID:nL19414904]).

Slovak central bank Governor Ivan Sramko told a news conference that the actual conversion rate of the crown/euro, which will be set around mid-2008, does not have to equal the new ERM-2 parity and that it also may differ from market levels.

"With the new central parity rate we expressed our view on where the Slovak crown should be," he said.

The crown had risen steadily in the past few weeks, driven 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.

(For FACTBOX on Slovakia's progress towards euro adoption, click on [ID:nL17177829]).