Czech crown skids to 4-mo lows, yield gap weighs

...versus Europe's single currency dampened investor appetite for crowns.

The crown shed nearly a quarter of a percent on the day to 28.390 per euro by 0915 GMT, having earlier dropped as low as 28.414, a level not seen since late October 2006.

The currency has deepened its losses to 3.5 percent since hitting an all-time high of 27.410 in late December.

The low cost of money -- with the 2.50 percent official rate the lowest in the European Union -- has led many investors to sell the crown for higher-yielding emerging markets assets, with the goal of capturing the interest rate spread.

"It looks as if the negative carry is weighing on the crown. We think it likely that EUR/CZK 28.5 will be tested," Pavel Sobisek, analyst at UniCredit Markets & Investment Banking, said in a morning report to investors.

The central bank is expected to leave interest rates flat on Thursday, reflecting lower than expected consumer price growth.

Such a decision would result in a widening of the Czech rate discount versus euro zone rates to a record 125 basis points if the European Central Bank hikes its rates by 25 basis points to 3.75 percent as markets widely expect on March 8.

Many analysts say the odds are strongly against the crown repeating its 6 percent rise against the euro last year, when it was the world's fourth best performing currency.

----------------- MARKET SNAPSHOT AT 0918 GMT ----------------- Crown/euro last deals at 28.390 (-0.21 pct) Crown/dollar at 21.553 bid (-0.25 pct)

5-year yield due Oct 2010 3.26 pct bid (-3 bps) 10-year yield due Jan 2016 3.72 pct bid (-3 bps)

5-yr CZK/EUR mid yield spread -74 bps (vs -74) 10-yr CZK/EUR mid yield spread -29 bps (vs -30)

Current levels versus prior domestic close at 1500 GMT ---------------------------------------------------------------

[PRAGUE/Reuters/Finance.cz]