Bullish mood lifts Czech, Slovak crowns to highs

(Writes through with new quotes, context, updates prices)

By Marek Petrus

PRAGUE, Nov 6 (Reuters) - The Czech and Slovak crowns firmed to record highs against the euro on Monday as expectations of a mild slowdown and an end to rate hikes in the United States reinforced a bullish mood on central European currency markets.

Slovakia and the Czech Republic have been the two fastest-growing economies among the four newest EU members in central Europe, expanding at an annual 6.7 percent and 6.2 percent respectively in the second quarter.

But analysts said the latest currency rally reflected growing global investor interest to take on risk in emerging markets offering greater potential for gains rather than the two economies' robust growth.

The Slovak crown, the region's top performer with nearly 5 percent year-to-date gain, climbed to a record 36.144 to the euro <0#EURSKK=>. It later stabilised at 36.175 by 1510 GMT, with dealers looking for a test of the 36 level by the year-end.

The Czech crown hit a high as 27.875 per euro <0#EURCZK=> retreating to 27.950, extending its year-to-date rise to 4.1 percent. It has gained 1 percent over the past week alone.

"The entire region is in a "sell-euro" mood," said one Bratislava-based foreign bank trader.

Central European currencies have benefited from U.S. data pointing to a soft landing in the world's biggest economy as well as from an improvement in investor risk appetite helped by expectations of no more Federal Reserve interest rate hikes.

"The risk premium is diminishing ... as U.S. rates have peaked and euro zone rates are predictable and in such an environment central Europe looks very positive," said Nigel Rendell, emerging markets strategist at Calyon in London.

RATE HIKE DELAY?

The Slovak currency has been at or near record highs for most of the past month, driven by the approval of the 2007 state budget -- which kept euro adoption in 2009 on track -- rating upgrades and a bullish sentiment on emerging markets.

The Czech crown joined the rally after staying on the back foot for most of October, held back by a five-month parliamentary stand-off and low interest rates which are a record 75 basis points below the euro zone.

The firming currencies are helping to keep a lid on import prices in the small and very open Czech and Slovak economies, aiding the two countries' central banks in their efforts to tighten the monetary screws to contain inflation pressures.

"The National Bank of Slovakia probably considers the recent strong appreciation of the Slovak crown as a sufficient restriction of monetary conditions," Ales Michl, analyst at Raiffeisenbank in Prague.

"But it still needs to tighten monetary policy through the interest rate channel," he added.

In the Czech Republic, the crown's firming prevented the debt market from tracking a fall in euro zone bond prices, as investors bet that rates would hold steady until at least January after 50 basis points worth of hikes so far this year.

"We believe the possibility of another rate hike is fairly limited as long as the crown remains at its currently record-strong level," analysts at Danske Bank said in a report. -- Additional reporting by Sujata Rao in London and Martin Santa in Bratislava ((Editing by David Christian-Edwards; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477))

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Keywords: MARKETS CZECH CROWN