UPDATE 1-Czech crown at five-week highs vs euro

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By Marek Petrus

PRAGUE, July 11 (Reuters) - The Czech crown extended daily gains to 0.8 percent on Wednesday, firming to a five-week high of near 28.3 to the euro as investors unwound crown-selling positions on expectations of interest rate hikes.

The crown rose as high as 28.312 per euro before pulling back to trade at 28.365 by 1430 GMT. It remained 3 percent weaker in the year-to-date despite this week's gains. The crown jumped more than 1 percent to 2-1/2 month highs around 20.55 to the weakening dollar , nearing life-time peaks around 20.48 against the U.S. currency seen in the middle of April.

The Czech policy rate stands at 2.75 percent , a record 125 basis points below the euro zone equivalent but markets are pricing in a rise to 4 percent within a year from now to tame resurgent inflation.

As investors pared back carry trades globally on jitters over the U.S. subprime mortgage market, the Czech crown got a boost along with leading low-yield funding currencies like the yen.

"It may be possible that expectations of interest rate increases on the back of CPI data led investors to rethink their view of the crown's future as a funding currency," said David Lubin, regional economist at Citigroup in London.

The crown outperformed regional peers like the Polish zloty and Hungarian forint , which gained only slightly or held around flat on late Wednesday afternoon.

Analysts said the crown could head towards 28.20 per euro.

Markets have been braced for further Czech interest rate hikes after inflation quickened beyond expectations and consumers helped to push the economy in early 2007 to its eighth consecutive quarter of 6-percent-plus growth.

Data on Wednesday showed inflation inched up in line with forecasts in June to match a nine-month high of 2.5 percent, cementing expectations that the European Union's lowest interest rates will rise to near a 5-year high of 3 percent this month.

"If the Czech central bank hikes to 4 percent within a year or so, as is pretty much priced into the yield curve, the crown would no longer really be a funding currency, and the crown should probably be quite stronger than it is," said Lubin.

----------------- MARKET SNAPSHOT AT 1436 GMT ----------------- Crown/euro last deals at 28.363 (+0.80 pct) Crown/dollar at 20.571 bid (+1.22 pct)

5-year yield due Oct 2010 4.07 pct bid (-3 bps) 10-year yield due Jan 2016 4.46 pct bid (-3 bps)

5-yr CZK/EUR mid yield spread -48 bps (vs -47) 10-yr CZK/EUR mid yield spread -11 bps (vs -10)

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