CEE MARKETS 3-FX falls led by forint, eyes on Latvia

                                
 * FX falls as Baltic nerves weigh
                                
 * Polish cbanker warns of Baltic spillover threat
                                
 * Hungarian industrial output falls sharply, hitting bonds
                                
 
  (Adds comments, updates prices)
                                
 By Jason Hovet
                                
 PRAGUE, June 5 (Reuters) - The Polish zloty hit a five-week
low on Friday, and central European currencies extended a drop
against the euro while investors awaited signals as to whether
Latvia will be able to avoid devaluing its lat currency.
                                
 Latvia's struggle to keep the lat pegged to the euro despite
a savage recession in its economy has rattled markets across
central Europe this week, and Polish central banker Dariusz
Filar said there was a threat the situation there could spill
over into other countries in the region. [ID:nL5301488]
                                
 At the same Warsaw conference, EU Monetary Affairs
Commissioner Joaquin Almunia said the executive was monitoring
Latvia and hoped to avoid spillover. He added east Europe could
face more difficult funding in the coming period. [ID:nL5431154]
                                
 The Polish zloty <EURPLN=> slipped 0.7 percent from
Thursday's domestic close to bid at 4.543 to the euro after
breaking above the 4.55 level earlier.
                                
 The forint <EURHUF=>, seen as a proxy for risk in the
region, fell 1 percent to 289.05 by 1141 GMT. 
                                
 "With the Baltic situation, everybody is looking for some
direction right now," a central European currency dealer in
Stockholm said. 
                                
 Latvian Prime Minister Valdis Dombrovskis reiterated on
Friday that no currency devaluation was planned.
                                
 He also said markets would calm after the government
completes an agreement with the International Monetary Fund and
European Union on budget cuts and loans to stabilise financing
and receive promised funds. [ID:nL5277381]
                                
 
                                
 FINANCE WOES
                                
 Hungary and Romania, like Latvia, have already received
IMF-led aid packages to plug financing gaps, and some analysts
fear that if the IMF allowed Latvia to devalue, this could
change aid strategies in other bailout countries.
                                
 The Romanian leu <EURRON=> held steady on Friday at 4.212
per euro and the Czech crown hit a six-week low, before
rebounding past the strong side of 27.
                                
 Danske Bank recommended avoiding long currency positions in
east Europe until the Latvia situation became clearer.
                                
 Currencies have stabilised somewhat in the past month after
rebounding around 10 percent in a 3-month risk rally, but many
strategists see a return to weakening in the coming months, with
widening budget deficits and rising joblessness weighing.
                                
 Analysts in a Reuters poll on Thursday expected the zloty,
forint, leu and Czech crown to then gain later this year.
[ID:nL4147117]
                                
 In Hungary, April industrial output plunged 27.1 percent
year-on-year, data showed on Friday, pushing bond yields up
around 15 basis points on the long end. [ID:nL5675647]
                                
 Hungary's government expects the economy to shrink more than
6 percent this year, leading a fall in central Europe's
economies after years of growth funded by investment and credit.
--------------------------MARKET SNAPSHOT--------------------
Currency                    Latest   Previous Local    Local
                                
                                  close    currency currency
                                
                                           change   change
                                
                                           today    in 2009 
Czech crown      <EURCZK=>   26.981   26.93   -0.19%    -0.85%
Polish zloty     <EURPLN=>    4.543    4.511  -0.7%     -9.42%
Hungarian forint <EURHUF=>  289.05   286.2    -0.99%    -8.82%
Croatian kuna    <EURHRK=>    7.348    7.359  +0.15%    +0.23%
Romanian leu     <EURRON=>    4.212    4.209  -0.07%    -4.69%
Serbian dinar    <EURRSD=>   93.936   94.036  +0.11%    -4.74%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond   CZ2YT=RR    -3 basis points to  141bps over bmk*
4-yr T-bond   CZ4YT=RR   +6 basis points to  +151bps over bmk*
8-yr T-bond   CZ8YT=RR   +2 basis points to  +261bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond   HU3YT=RR    -5 basis points to  +819bps over bmk*
5-yr T-bond   HU5YT=RR   +6 basis points to  +789bps over bmk*
10-yr T-bond   HU10YT=RR +13 basis points to  +690bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1343 CET.
Currency percent change calculated from the daily domestic 
close at 1500 GMT.
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 (Reporting by Reuters bureaus, writing by Jason Hovet, editing
by Stephen Nisbet)