Czech crown hugs range vs EUR,hits new high vs USD

...strong March producer prices bolstered the market's view that interest rates will rise later this year.

The crown traded at 27.968 per euro by 0815 GMT, hemmed within a range that has held since the start of this month and some 2 percent weaker from lifetime peaks reached in late 2006.

It hit new record highs on the stronger side of 20.60 to the U.S. dollar , which has been approaching an all-time low to the euro .

The low-yielding crown, used by many investors as a funding currency for investment in higher-yielding central European currencies, has not shared the firming enjoyed by regional peers over the past few months.

Some analysts said it had increasingly tracked the Japanese yen and Swiss franc , the world's two most popular funding currencies which investors prefer to sell to reap an interest rate carry in higher-yielding asset markets elsewhere.

Czech industrial producer prices rose by a faster-than-expected 3.6 percent year-on-year, their quickest gain in nearly two years. Growth in agriculture producer prices also accelerated, to 15 percent year-on-year [ID:nL16295749].

"If we take producer prices as one of the leading indicators of consumer prices, then today's news speaks in favour of an interest rate increase this year," said David Marek, chief economist at Patria Finance.

At 2.50 percent, the main Czech policy rate has been the lowest in the European Union and third lowest among central banks of developed nations, after Japan and Switzerland.

A firm crown has helped keep inflation below the bottom end of the central bank's target since October last year, making it pause after raising the policy rate by a cumulative 75 basis points between October 2005 and September 2006.

Most market watchers expect a further 25 basis point interest rate increase in the summer, to keep a lid on price growth in an economy which is forecast to slow only slightly from last year's record 6.1 percent annual growth pace.

----------------- MARKET SNAPSHOT AT 0815 GMT ----------------- Crown/euro last deals at 27.968 (+0.03 pct) Crown/dollar at 20.630 bid (+0.28 pct)

5-year yield due Oct 2010 3.49 pct bid 10-year yield due Jan 2016 3.94 pct bid

5-yr CZK/EUR mid yield spread -71 bps 10-yr CZK/EUR mid yield spread -28 bps

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