UPDATE 2-Czech crown hits record high but upside capped

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By Jan Lopatka

PRAGUE, Sept 17 (Reuters) - The Czech crown hit an all-time high versus the euro early on Monday as the dollar stood near all-time lows and funding currencies gained on investors' risk aversion, but the rise was seen as short-lived.

The Czech currency touched 27.385 to the euro in early trade, up from 27.45 late on Friday.

The gains put it above the previous high of 27.41 seen in December 2006 and in January this year, and 5 percent firmer from this year's low seen in July.

The crown began its upward march in the summer as investors unwound carry trades, boosting low-yielding units such as the crown and the Japanese yen.

The crown later slipped back to 27.445 by 0935 GMT, in line with other emerging market currencies weakened by fears surrounding British bank Northern Rock, which sought emergency funding from the Bank of England as the credit markets which it used to fund its asset growth dried up in recent weeks.

"The Czech crown remains the region's outperformer, supported by funding currencies' strength, robust foreign trade performance and expectations of a narrowing interest rates differential ahead," said Michal Dybula, an economist at BNP Paribas.

The crown probed new highs against the dollar on Monday morning, rising to 19.712 bid early on Monday before dipping to 19.766/808 at 0925 GMT, as investors weighed the chances of either a 25 or 50 basis point interest rate cut in the United States on Tuesday.

NOT FIRMLY ON UPWARD PATH

Analysts said the crown rise may slow down the central bank's tightening campaign which brought the key two-week repo rate to 3.25 percent in three quarter percentage-point steps over the summer.

The increases have narrowed the interest rate discount versus the euro to 75 basis points, lowering the crown's appeal as a funding currency for positions in higher-yielding assets.

"The development so far works in the direction that the CNB (central bank) will revise its hawkish outlook," said Miroslav Plojhar, an analyst at JP Morgan Chase Bank, who expects one more quarter-point rate rise this year in October or November.

But he said he did not see the crown on a firm upward path, with expected dividend payments to foreign owners of local companies pushing the exchange rate lower.

A small July current account deficit reported last week surprised the market with relatively thin dividend outflows, but Plojhar said it seemed to be a pause and dividend payments would start flowing again in the next few weeks.

"We view this sharp appreciation as a short-lived swing," said Raiffeisenbank in a report. "Both technical and fundamental analyses do not justify such a swift move by the crown to these strong levels."

Central bank Vice-Governor Ludek Niedermayer told Reuters on Friday that the sharp crown rise changed the inflation outlook, and that rates may have risen to a level where they may stay for some time, a comment that might work against crown strength.