Slovak crown at new highs, seen testing key level

...push the unit further up in the near term.

The Slovak unit firmed as far as 35.090 per euro on Monday, before easing back to 35.140 as of 1510 GMT. It was at 35.370 late on Friday.

"There was strong selling (of euros) from all sides," one Bratislava-based trader said. "The currency is likely to test the psychological level of 35.0 per euro in the near term."

The initial crown firming came after the release of higher than expected November inflation data as some players viewed it as a signal for the central bank (NBS) to raise interest rates.

The NBS has raised the key two-week repo rate by 175 basis points to 4.75 percent this year because of inflation risks stemming from energy costs and fast economic growth, and some analysts say a further 25 basis point rate increase is possible in the coming months.

But market watchers said on Monday the strong crown - it has risen by 7 percent in the past three months - has reduced the likelihood of a hike at the Dec. 19 policy meeting.

"Monetary conditions have been tightened through the exchange rate channel," CSOB Bank said in a market report.

"Furthermore, a positive inflation outlook is not forcing the central bank to raise interest rates. Therefore, we would not be surprised if the bank board left rates unchanged."

Investors will watch a parliamentary vote on the 2007 state budget draft, scheduled for Tuesday, as the fiscal plan will be a key step towards Slovakia's aim to adopt the euro in 2009.

The market expects the ruling coalition majority to easily endorse the government's proposal to cut the fiscal deficit to 2.9 percent of GDP, but analysts will be looking for details of state spending plans to see if they contain inflation risks. ----------------MARKET SNAPSHOT AT 1510 GMT------------------- Crown/Euro 35.140 vs 35.370 on Friday (+0.65 pct) Crown/Dollar 26.641 vs 26.545 (-0.38) 5-yr govt bond yield unchanged at 4.350/4.150 pct 8-yr govt bond yield 4.245/4/085 vs 4.170/4.079 pct --------------------------------------------------------------

[BRATISLAVA/Reuters/Finance.cz]