East European Currencies: Zloty Has Biggest Gain in Two Years

By Ewa Krukowska

July 24 (Bloomberg) -- Poland's zloty rose the most since July 2006 against the euro, snapping a three-day decline and trading near a record, on bets the central bank will raise interest rates to contain inflation. The Czech koruna advanced.

Some policy makers say more rate increases may be necessary to curb inflation, while others argue they might lead to ``excessive'' appreciation of the zloty, the minutes of the central bank's June meeting showed today. The zloty has gained 11 percent against the euro and 17 percent against the dollar this year as the central bank boosted its main interest rate to a three-year high of 6 percent. The rate was raised by a quarter- point last month.

``Fast money is returning to emerging markets after the big sell-off earlier this week and the zloty is benefiting most, especially given the belief the rate-tightening cycle is not over yet,'' said Elisabeth Gruie, a currency strategist in London at BNP Paribas SA, France's biggest bank. ``It's keeping the currency in demand and it's likely to continue.''

The zloty climbed as much as 1.4 percent to 3.2182 against Europe's common currency, and was at 3.2264 by 3:29 p.m. in Warsaw. It rose to a record 3.2085 per euro on July 17.

The currency may gain further in the next few days, possibly strengthening beyond 3.20 versus the euro, Gruie said.

The zloty has recovered most of the losses sustained at the beginning of the week after comments by Czech central bank Governor Zdenek Tuma on July 22 dented appetite for currencies in central Europe. He said the Prague-based bank may cut interest rates as soon as next month because the koruna's strength threatens to ``damage'' the economy.

Timing Key

``The question is more about the timing of rate hikes, not about rate cuts,'' said Ulrich Leuchtmann, an analyst in Frankfurt at Commerzbank AG, Germany's second-biggest bank. ``We regard the zloty as the most attractive currency among the three central European economies.''

Futures trading suggests investors expect borrowing costs to rise at least once more this year. The forward-rate agreement, used to gauge bets for the three-month Warsaw Interbank Offered Rate beginning three months from now, traded at 6.72 percent. The Wibor was at 6.58 percent, with the gap between two indicating the size of the expected rate increase.

The central bank raised its main rate by 2 percentage points since April last year to curb inflation, which accelerated to 4.6 percent in June. The bank's target for inflation is 2.5 percent.

In other trading, the Czech koruna rose against the euro as some investors judged the currency's exchange rate was attractive following two days of declines.

Koruna Rate

The currency gained as much as 1.3 percent to 23.499 per euro, and was at 23.597, from 23.594 yesterday. It declined earlier to 23.865, the weakest level since July 4.

``Some investors probably decided to take profits,'' said Jon Harrison, a currency strategist at Dresdner Kleinwort in London. ``Fundamentally, Tuma's comments significantly reduce chances for a rate hike, removing support for the currency.''

The koruna has gained 11 percent against the euro and 17 percent versus the dollar this year, making it the best performer of the emerging markets.

It may drop to 24.1 against the euro at the end of this month, Harrison said, adding that he didn't see room for a rate increase as long as the koruna trades between 23 and 25.

The central bank has raised its two-week repurchase rate eight times in the past three years, to 3.75 percent, to stem inflation. The euro-region's benchmark rate is 4.25 percent. The Prague-based central bank meets Aug. 7 to set interest rates.

The Romanian leu advanced 0.1 percent to 3.5734 per euro and the Hungarian forint advanced 0.9 percent to 232.13 against Europe's common currency.

Hungarian retail sales fell an annual 1.6 percent in May, a report by the Budapest-based statistics office said today. The median forecast of five economists in a Bloomberg survey was for a 2.1 percent decline.

The Slovak koruna, which will be replaced by the euro at the start of next year, was little changed at 30.375 against Europe's single currency. The Turkish lira was at 1.2032, from 1.2036 yesterday.

To contact the reporter on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net