Czech crown rallies to peaks, curbs rate hike bets

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By Marek Petrus

The Czech crown firmed to life-time highs against both the euro and the dollar for a third straight session on Monday, benefiting from a robust economy and its status as a central European safe haven.

A concern that the U.S. economy could slow heightened investors' aversion to take risk, sparking heavy selling in equities and high-yield such as the Turkish lira, and boosting low-yield currencies as the crown.

The rallying crown has stifled any lingering expectations that the Czech central bank (CNB) would raise interest rates at its Thursday's meeting to contain inflation fuelled by strong demand growth in the economy.

The crown peaked at 27.143 per euro by 0825 GMT breaking the previous high of 27.195 seen on Friday.

It rose to record levels around 18.90 against the broadly weaker dollar, according to Reuters data.

"The market could be testing the 27 per euro level," said one Prague-based dealer with a major international bank.

"I am not saying that level would be hit soon but one cannot rule out a further quick rise in the crown by the end of this year, similar to one that we saw late last year," he added.

The Czech currency has drawn strength from economic growth of about 6 percent for the third year running and a surplus trade balance, a backdrop which tends to spur fund flows from investors seeking a safe haven in periods of risk aversion.

Neighbouring Polish zloty gained slightly after the opposition centre-right Civic Platform won a parliamentary election on Sunday, raising hopes the pro-business party would speed up market reforms [ID:nL16150913].

Only five out of 16 analysts in a Reuters poll last week [CNB/INT] forecast an interest rate increase from the CNB on Thursday. At least one of the five has since said the crown's ascent was making a hike less likely.

"The crown has firmed more than 3.5 percent since the CNB's most recent forecast, which is a strong enough reason not to rush with a rate rise," analysts at CSOB bank said in a report.

The CNB raised interest rates to a five-year high of 3.25 percent in August. The strong crown and uncertainty about the extent of damage to global growth from credit and liquidity squeeze has since led policymakers to temper hawkish rhetoric.

In small and open economies like the Czech Republic, currency shifts quickly alter the inflation and growth outlook.

[PRAGUE/Reuters/Finance.cz]