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Hungarian forint set for fifth week of gains on rate increase

The Hungarian forint headed for a fifth consecutive week of gains against the euro after the central bank increased the benchmark interest rate.

Hungarian borrowing costs, the highest in the European Union, boosted demand for forint-denominated assets such as bonds. Investors use the so-called carry trade, borrowing money elsewhere, in the euro region for example, at a lower rate, to buy forints and invest in Hungarian debt. „The attraction of the yield drives the forint,” said Barbara Nestor, emerging markets strategist at Commerzbank AG in London. „Carry trade prompted the market to buy the forint. Against the euro, the forint added 0.4% this week, to 261.59 per euro at 11:24 a.m. in Budapest. The currency may advance to 260 per euro next week, Nestor said. Hungary's central bank raised its benchmark interest rate to 8% on October 24, the fifth consecutive increase, as inflation is expected to accelerate.

The central bank's 13 policy makers lifted the two-week deposit rate, the highest in the European Union, by 25 basis points. That matched the median forecast of nine out of 17 economists in a Bloomberg News survey. The yield difference, or spread, investors demand to hold Hungarian 10-year debt rather than similar-maturity German bonds is 3.38%, compared with 2.94% five months ago. The gain in the forint today may be limited as Hungarian farmers plan to block roads and protest in Budapest to demand Prime Minister Ferenc Gyurcsány’s resignation, Népszava reported, without citing anyone. Gyurcsány has been facing calls for his departure for more than a month. Demonstrations degenerated into riots several times over that period, producing the worst street violence in Hungary since an uprising fifty years ago. (Bloomberg)