RPT-Czech crown at 7-wk highs, more carry trades pared

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PRAGUE (Reuters) - The Czech crown continued its ascent to reach seven-week highs and close the week 1.5 percent firmer against the euro, as a sliding dollar triggered an unwinding of carry trades funded from crowns.

The crown, a popular source of cheap funds for investors because Czech rates are the lowest in the European Union, rose third of a percent on the day to trade at an intraday high of 28.160 per euro by 1505 GMT.

The crown firmed to a life-time peak around 20.38 to the dollar, with dealers reporting massive trimming of selling positions in the crown which were used to fund dollar or other high-yield assets.

The U.S. currency also dropped to a record low against the euro after weak U.S. retail sales figures.

"It was all driven by the dollar. Volumes that went through the market were brutal," said one Prague-based trader.

Investors have preferred to use the crown along with leading low-yield funding currencies like the Japanese yen for a strategy known as a "carry trade," selling a cheap currency for a high-yield one with the goal of capturing the yield spread.

This week's rally was fuelled by a reversal of a large number of the crown-funded carry trade bets built over the past months, as investors grew wary about keeping exposure to riskier investments in high-yield assets.

A Reuters poll on Friday showed analysts expecting the crown to hold around current levels in the near-term but climb to lifetime peaks around 27.3 per euro within a year [CZK/POLL].

At 2.75 percent, the Czech policy rate is the third lowest among developed economies after Japan and Switzerland.

It is a record 125 basis points below the euro zone equivalent but the gap is likely to shrink later this month as markets widely expect the Czech central bank (CNB) to hike by a quarter of a percentage point to tame budding price pressures.

CNB Vice Governor Ludek Niedemayer, whom markets regard as the most hawkish CNB board member, bolstered the case for further rate hikes by telling Bloomberg in an interview that rising inflation will require tighter policy [ID:nL13800978].

----------------- MARKET SNAPSHOT AT 1505 GMT ----------------- Crown/euro last deals at 28.160 (+0.60 pct) Crown/dollar at 20.427 bid (+0.45 pct) 5-year yield due Oct 2010 4.12 pct bid (+4 bps) 10-year yield due Jan 2016 4.49 pct bid (+1 bps) 5-yr CZK/EUR mid yield spread -51 bps 10-yr CZK/EUR mid yield spread -15 bps

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