Czech crown at near 3-mth high, eyes 28/euro level

...investments prompted investors to buy back crowns sold earlier to fund high-yield trades.

Czech interest rates at just 2.75 percent have turned the crown into a popular source of cheap funds for investors looking to lock in higher yields elsewhere through carry trades.

The crown tracked the rally in Japan's yen , the primary funding currency, which rose to a 2-1/2-month high against the dollar due to worries about worsening U.S. credit market problems and housing sector weakness [FRX/].

The crown rose as high as 28.096, a level not seen since early May, before pulling back. It last dealt at 28.115 per euro by 0805 GMT, up 0.2 percent on the day. It traded at around 20.400 to the weak dollar , near life-time highs.

"The crown has taken advantage of rising risk aversion," said analysts at Informa Global Markets in London.

"It looks like the 28.10 (per euro) level offers near-term support but we could see a move to the key psychological 28.00 level in the sessions ahead," they added in a report to clients.

The crown has also drawn support from widespread expectations of a 25 basis point interest rate hike by the central bank (CNB) on Thursday. This month's gains have helped cut the crown's year-to-date losses to 2.2 percent to the euro.

Most analysts expect the CNB to raise rates to 3 percent at Thursday's monthly meeting, to prevent a weaker currency and buoyant spending from stoking price pressures in the strong economy [CNB/INT].

----------------- MARKET SNAPSHOT AT 0803 GMT ----------------- Crown/euro last deals at 28.115 (+0.20 pct) Crown/dollar at 20.411 bid (-0.24 pct)

5-year yield due Oct 2012 4.27 pct bid (+1 bps) 10-year yield due Apr 2017 4.62 pct bid (flat)

5-yr CZK/EUR mid yield spread -11 bps (vs -15) 10-yr CZK/EUR mid yield spread 22 bps (vs 19)

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