Czech crown steadies after sharp gain, seen firmer

...nearly 1 percent in the previous session to a five-week high on an unwinding of crown borrowing.

The crown, a popular source of cheap funds for investors because Czech rates are the lowest in the European Union, traded 0.1 percent weaker at 28.350 per euro by 0905 GMT. On Wednesday it advanced as high as 28.312.

The crown held steady around 20.550 to the dollar , within sight of life-time peaks around 20.48 seen in April.

"The euro/crown's recent move has been pretty sharp, lots of stop loss orders were executed on the dollar/crown and carry trades appeared to have been unwound," said Miroslav Tutter, senior currency dealer at CSOB bank in Prague.

"The crown may correct back to the 28.400 area, but we are likely to see attempts to push the crown higher still," he added.

The market's jitters over problems in riskier U.S. credit markets prompted investors on Wednesday to pare back carry trades in which they borrowed low-yield currencies like the crown to invest in high-yield but riskier markets.

Analysts said low rates were likely to hold the crown back from further sharp rises but urged caution about selling the crown heavily in the carry trade, partly due to expectations of a 25 basis point interest rate increase to 3 percent this month.

Despite its rise this week, the crown has remained the worst performing currency in central Europe this year.

It has lost 3 percent in the year so far, while the Slovak crown , the Polish zloty and the Hungarian forint have advanced 2-3 percent over that period.

"We continue to view the crown as a good alternative funding currency to the Swiss franc and Japan's yen and we do not expect any massive strengthening," said Lars Christensen, senior analyst at Danske Bank in Copenhagen.

"However, at present levels it might be prudent for investors to trim their euro/crown positions, as euro/crown could move down further -- at least in the short term," he said, adding a break through 28.268 could herald a further rise in the crown.

The Czech policy rate stands at 2.75 percent , a record 125 basis points below the euro zone equivalent, after a 25 basis point hike in May. But markets are pricing in a rise to 4 percent within a year from now to tame resurgent inflation.

----------------- MARKET SNAPSHOT AT 0907 GMT ----------------- Crown/euro last deals at 28.350 (-0.08 pct) Crown/dollar at 20.548 bid (+0.08 pct)

5-year yield due Oct 2010 4.12 pct bid (+5 bps) 10-year yield due Jan 2016 4.47 pct bid (+2 bps)

5-yr CZK/EUR mid yield spread -47 bps (vs -49) 10-yr CZK/EUR mid yield spread -13 bps (vs -12)

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