By Michael Winfrey
PRAGUE, July 7 (Reuters) - The prospect of short-term rate
hikes should keep emerging Europe's currencies at new record
levels, a trend boosted by strong growth and anticipation of
long-term appreciation on the road to the euro zone.
Defying market forecasts of a correction this summer, the
Polish zloty and Czech crown have jumped to all-time highs
against the euro. Hungary's forint is at a 5-1/2-year peak, and
the Romanian leu, which has lagged its peers, is also firming.
Market watchers say the main factor is the promise of higher
interest rates, a result of aggressive hikes by the region's
central banks to combat inflation.
And although economic growth has been tempered by a
deceleration in the euro zone -- the main market for the
region's exports -- analysts said it is still outperforming
Western Europe and other markets, helping to take the edge off
of global risk aversion.
Following the European Central Bank's 25 basis point rise
last week and comments from ECB President Jean-Claude Trichet
quashing the prospect that a tightening cycle had begun,
analysts expect emerging European yield spreads to widen.
"With these central banks set to tighten across the board,
and following the latest ECB statements, investors see these
currencies and the associated carry as a good short-term bet,"
said analyst Ivailo Vesselinov from Dresdner Kleinwort.
"There are no major signs at present that this trend is
facing an imminent reversal."
STRONG GROWTH
The Czech crown -- with a 50 basis point discount to euro
zone rates but seen as a safe haven unit -- extended gains to
the euro on Monday to a new record high of 23.545 <EURCZK=>. The
zloty <EURPLN=>, at 3.312, matched its own all-time high.
In Hungary, the forint <EURHUF=> was at 232.70, near a 5-1/2
year high of 232.88. Reuters market polls show most analysts
expect most of the currencies to weaken through the year end,
but they continue to firm (click on []).
Appreciation is hitting exports. Czech sales abroad were
flat in June in crown terms, compared with double digit growth
earlier this year. But the currencies are helping temper the
global surge in inflation caused by high energy and food prices.
And the negative effect on exports has only mildly tempered
growth. The Czech economy is expected to slow to around 4.5
percent growth and Poland, boosted by strong domestic demand, is
seen at around 5.5 percent. Both grew by 6.6 percent in 2007.
In Romania, the central bank sees its economy accelerating
to 8 percent growth in 2008, from 6 percent last year.
Even Hungary, which as the region's laggard crept ahead a
seasonally adjusted 0.9 percent in the first quarter, has got a
shot in the arm after German carmaker Daimler <DAIGn.DE> said
last month it would build an 800 million euro car plant there.
Commerzbank analyst Barbara Nestor said despite the rate
hikes and the squeeze of the economic slowdown in the euro zone,
the relative strength left few reasons to sell at present.
"If the price pressure or trade shocks are not excessive,
these currencies will probably continue to strengthen a little
bit more," she said.
CONVERGENCE
Christoph Rosenberg, The International Monetary Fund's
senior representative for the region, said the underlying story
was the currencies would appreciate in real terms no matter what
in the long run, as the region catches up with the richer West.
"This process can happen through either inflation being
higher here than in the euro zone, or through the nominal
exchange rate appreciating," he said.
"And right now it's happening through the nominal exchange
rate because central banks are concerned about getting inflation
back to their targets."
Some analysts say the example of Slovakia, which revalued
its crown twice -- 15 percent in May and 9 percent a year
earlier -- ahead of 2009 euro zone entry, indicates the European
Commission will encourage euro candidates to let their
currencies strengthen as much as possible before euro zone
entry.
The market expects Warsaw, Prague, Budapest and Bucharest to
wait four or five years before adopting the euro, and a lot can
happen between now and then. But the end result will be gain.
"It's just a timing difference of whether you price it in
now or later," Nestor said.
(Editing by Victoria Main)
