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Hungarian forint gains on forecast of shrinking budget deficit

The Hungarian forint gained, snapping a two-day losing streak, after the central bank said Hungary may have a lower budget shortfall next year than the government forecasts.

Hungary, which has missed its budget deficit target in each of the past four years, aims to narrow the gap by two-thirds by 2009. The shortfall next year will be lower than the government's target, István Hamecz, the central bank's chief economist, said yesterday, boosting analysts' confidence in measures introduced to cut spending and boost budget revenue. „The recent comments on the budget from the central bank are supporting the forint,” said Illés Tóth, a currency and bonds analyst at DZ Bank AG in Budapest. „The market is rather optimistic about the prospects of Hungary's fiscal reforms.” The forint advanced to 260.21 per euro at 5:36 p.m. in Budapest, from 261.32 late on Wednesday.

It has gained 3.6% against the euro over the last three months, as investors have been buying the forint to invest in high-yielding Hungarian bonds. Hungarian borrowing costs, the highest in the European Union, are stoking demand for forint-denominated assets. The yield difference, or spread, investors demand to hold Hungarian 10-year debt rather than similar-maturity German bunds is 3.39%, compared with 2.72% five months ago. Prime Minister Ferenc Gyurcsány’s government raised taxes and cut subsidies to trim the European Union's widest budget deficit. Gyurcsány’s cabinet currently expects the shortfall to shrink to 6.8% of GDP in 2007 from 10.1% this year. (Bloomberg)