UPDATE 2-Czech crown scales new peak, despite cbank warning

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By Marek Petrus

The Czech crown rose to a lifetime high versus the euro on Thursday, extending its year-to-date gains to nearly 5 percent despite central bank concerns about its strength.

Many analysts were puzzled by the firming and cautioned a deteriorating external deficit spoke in favour of a weaker currency, or at least a dampening of its prospects for a further advance next year.

Euro selling by London banks initially sent the crown to 27.815 per euro , beyond a previous all-time peak of 27.820 reached in offshore trade on Nov. 30.

The currency later gained further ground and reached as high as 27.700. It later stabilised and traded at 27.725 at 1520 GMT, up half a percent on the day.

"Some London names are selling euros for crowns. So far it seems to be most probably linked to a one-off mid-sized commercial order," said one Prague-based dealer with a major international bank.

The crown's firming confounded many analysts who turned bearish on the currency after Wednesday's data showing the 12-month current account deficit widened to an equivalent of 4.6 percent of GDP, more than double the 2.1 percent at end-2005.

It came despite Monday's warning by central bank Governor Zdenek Tuma in a Reuters interview that the crown's rise to record highs to the euro and the dollar over the previous weeks was on the verge of being "totally crazy" [ID:nL11602090].

The currency also ignored Thursday's collapse of talks on forming a new broad coalition government, which extended a political crisis lasting since an election in June.

"There is neither fundamental nor political justification for the crown to hold at such strong levels," said Miroslav Frayer, analyst at Komercni Banka in Prague.

The crown has underperformed central European emerging market currencies over the past weeks, weighed down by a record one percentage point short-term rate discount versus the euro zone and the deepening current account shortfall.

The crown's more than 1 percent firming since end-October has lagged a rise of about 2 percent in the zloty , a 3 percent gain in the forint and a more than 4 percent jump in the Slovak crown .

Low borrowing costs, at 2.50 percent the lowest in the European Union, have prompted many market players to sell the crown to buy the other, higher-yielding regional currencies in the so-called carry trade.

Dealers said it was unclear whether the currency's rise on Thursday reflected unwinding of selling positions in the crown.

[PRAGUE/Reuters/Finance.cz]