(Writes through with quotes, background, updates prices)
By Marek Petrus
PRAGUE, Nov 9 (Reuters) - The Czech crown firmed to lifetime highs versus both the euro and the dollar on Friday, as capital poured into safe haven assets and a surge in Czech inflation raised the chances of a currency-supportive interest rate hike.
The crown rose 0.8 percent on the day to as high as 26.631 per euro <0#EURCZK=> by 1135 GMT, breaking the previous record of 26.820 from Oct. 26. It has rallied 8 percent since this year's lows in early July and is up 5.4 percent over a year ago.
The Czech currency scaled a new peak of 18.10 to the weak dollar <CZK=>, extending its year-on-year gains to 21 percent.
The crown, seen as central Europe's safe haven currency, was benefiting along with the Japanese yen and Swiss franc from a capital flight to quality out of dollar assets on concern that more U.S. financial firms will be hit by credit market turmoil.
The crown's record strength prompted the central bank (CNB) to hold its main rate at a five-year high of 3.25 percent for the second straight month in October, but higher than expected inflation data published on Thursday spoke in favour of a hike.
Inflation leapt to 4.0 percent from 2.8 percent in September for the highest annual rate in nearly six years, above both the CNB and market forecasts of 3.8 percent [].
"The crown is gaining on the back of stop losses and a weak dollar. The inflation number was also high, and we burst through 26.800, which was a key technical level," said Miroslav Tutter, senior currency dealer at CSOB bank.
"From the inflation point of view, the situation is ripe for a rate hike. However, the crown's firm fx rate may discourage the central bank from delivering one just yet," he added.
RATE GAP MAY CLOSE
The upside inflation surprise boosted short-dated money market rates on Thursday on the view that a 25 basis point rate hike was a near certainty before the year-end, following 150 basis points of tightening between October 2005 and August 2007.
However, the dampening effect the firm crown has on core inflation pressures has chilled expectations that a sharp additional rate increase will be needed in 2008 to contain pressures stemming from robust demand growth and wage rises.
"We expect the CNB to hike interest rates later this month and accept a stronger crown to curb inflationary pressures," said Carsten Fritsch, analyst at Commerzbank, said in a report. "Seasonal factors and year-end corporate hedging should support the crown as well in the weeks ahead."
Robust economic growth, expected to top 6 percent annually for the third year running in 2007, and a surplus foreign trade balance have underpinned the crown, despite its interest rate disadvantage against the euro.
Some analysts expect the rate discount versus the European Central Bank's 4 percent rate to disappear next year.
"We think that the inflation pressures will lead the CNB to 'normalise' rates by closing the current negative gap with the ECB, and potentially (it) may have to increase rates above 4 percent," Istvan Zsoldos at Goldman Sachs said in a report. (Reporting by Marek Petrus; Editing by Gerrard Raven) ((prague.newsroom@reuters.com; +420 224 190 477; Reuters Messaging: marek.petrus.reuters.com@reuters.net))
---------------------- MARKET SNAPSHOT ------------------------ Crown Currency Latest Prev Pct change Pct change
close on day in 2007 vs Euro <EURCZK=> 26.687 26.850 +0.72 +3.05 vs Dollar <CZK=> 18.170 18.278 +1.04 +15.06
Equities PX Index <> 1,850.9 1,860.9 -0.54 +16.49
Domestic Govt Bonds Latest Prev Yld change Yld change
close on day in 2007
5Y Yield <CZ5YT=RR> 4.34 4.36 -2 bps +110 bps 10Y Yield <CZ10YT=RR> 4.54 4.55 -1 bps +83 bps
Mid Yield Spreads (in bps) Spd change Spd change
on day in 2007
5Y vs <EU5YT=RR> +42 +0 +3 +106 10Y vs <EU10YT=RR> +44 +42 +3 +68 --------------------------------------------------------------- All data taken from Reuters at 1132 GMT. Currency percent change and yield change calculated from prior domestic close at 1500 GMT.
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Crown Spot Against EUR <EURCZK=> Against USD <CZK=> Czech Bonds <0#CZBMK=> C.Europe Bonds <CEEBONDS> Crown FRAs <CZKFRA=TTKL> Central Bank Fixings <CNB02> Contrib. Cross Rates <CZKX1=> Czech Central Bank <CNB01> -------------------------------------------------------------- HOW TO FIND INFORMATION YOU NEED
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Keywords: MARKETS CZECH CROWN RECORD
