Czech crown plumbs 14-month lows, low yield weighs

...investors to keep selling the low-yielding crown for high-yielding assets in other markets.

The crown shed 0.2 percent on the day at 28.600 per euro by 1325 GMT, extending its losses since the start of this month to one percent. It dropped as low as 28.640 to the euro earlier, hitting its weakest level since mid-April 2006.

It fell a quarter of a percent against the dollar , which rose to a 4-1/2-year high against the Japanese yen.

Alongside the yen, the crown has become a popular funding currency for a strategy known as "carry trade," in which investors sell a low-yielding currency for higher-yielding assets with the goal of capturing the interest rate spread.

"Stronger risk appetite has put carry trades back on the agenda," Lucy Bethell, strategist at Royal Bank of Scotland, said in a report to investors.

Analysts in Prague said a sustained break of the 28.600 per euro level could spark a further fall in the crown towards the 29 level, but its losses should be capped around 29.100.

Global investors' appetite for risk improved early in the day as benchmark U.S. Treasury yields receded from their recent peaks, helping emerging market currencies including the Polish zloty and Hungarian forint to inch higher on Thursday.

But the record 125 basis point gap between the Czech National Bank's 2.75 percent policy rate and the 4.0 percent euro zone equivalent has dampened the crown's allure despite robust fundamentals and much faster economic growth than in the euro zone.

"The growing risk of a July rate hike in response to currency weakness won't alter interest rate differentials dramatically," added Bethell.

Many investors have bet this month's slide in the crown has raised the chances of another quarter-percentage point interest rate increase to a near 5-year high of 3.0 percent as early as July.

But policymakers have been split over whether further urgent tightening is needed after a quarter point rise in May, due to the strongest growth in household spending in 3 years and the risk of inflation topping the 3 percent target this year.

----------------- MARKET SNAPSHOT AT 1325 GMT ----------------- Crown/euro last deals at 28.600 (-0.19 pct) Crown/dollar at 21.495 bid (-0.25 pct)

5-year yield due Oct 2010 3.95 pct bid (flat) 10-year yield due Jan 2016 4.36 pct bid (flat)

5-yr CZK/EUR mid yield spread -63 bps (vs -65) 10-yr CZK/EUR mid yield spread -28 bps (vs -28)

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