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Slovak koruna gains to record, lifts Eastern Europe, on EU rate

The Slovakian koruna rallied to a record high after the country gained approval from the European Union to lift the so-called central parity rate versus the euro.

The koruna rose 3.2% against the euro, more than any other currency. The Hungarian forint and Polish zloty were the world's second and seventh best performers. Slovakia sold koruna in March to curb gains that pushed it to within 3% of an EU limit on the exchange rate. The koruna must hold within 15% of the parity rate before it can enter the euro region. „This means the central bank expects stronger appreciation of the currency,” Stefan Kolek, an emerging markets strategist at UniCredit MIB, said in Munich. „The economy will keep its strong growth. This will be supportive for the currency.” The koruna reached an all-time high of 32.78 against the euro and traded at 33.89 by 4:15 p.m. in Bratislava, from 33.94 on March 16 before the revaluation.

The EU lifted the parity rate by 8.5% to 35.4424, Finance Minister Jan Pociatek said on March 16 in Bratislava. The koruna is trading around 9% below EU's upper limit following the increase in the central rate. The koruna rose almost 14% in the past year, the best performing currency in the world, as companies including PSA Peugeot Citroen and Kia Motors Corp. opened factories and economic growth accelerated to a record. The central bank sold the koruna as recently as March 8 to try to curb the advance. „There will be more exports from Slovak car factories, pushing up the currency,” said Kolek, who said the koruna will trade around 33.3 against the euro this week.

The Hungarian forint advanced to its highest since September 2005 today and traded at 245.86 per euro in Budapest. The Czech koruna gained to 27.75 per euro, from 27.86. „The news is positive for the entire region,” said Martin Stelzeneder, an analyst at Raiffeisen Zentralbank Oesterr in Vienna. „It was awaited, but nobody knew when it would come.” Central bank governor Ivan Sramko today said the koruna is „too strong.” He also said the risk of inflation prevents policy makers cutting interest rates to damp currency gains. Slovakia aims to become the latest former-communist country to join the 13-member euro-region after Slovenia adopted the currency this year. Lithuania, Estonia and Latvia had to push back timetables for adopting the euro because their inflation rates were above limits set by European authorities. Greece was the last country to revalue within Europe's exchange-rate mechanism in 2000. „The revaluation is based on a firm commitment by the authorities to pursue appropriate supportive policies” including tackling wage pressures and credit growth, the EU said in a statement released from Brussels.

Allowing the currency to strengthen further will help damp inflation by lowering the cost of imports for Slovak consumers. To adopt the euro, a country must slow inflation to within the average of the three EU countries with the lowest 12-month inflation rates plus 1.5 percentage points. Slovakia's 12-month inflation rate was 3.9% in February and to qualify it will need to cut the rate further. The estimated ceiling for euro adoption was 2.9% in February. Against the dollar, the koruna has strengthened more than 24% in a year. Slovak government bonds have risen 26.8% in dollar terms, second only to Thai debt, according to indexes of 27 emerging-market debt securities compiled by JPMorgan & Co. The economy grew a record 8.3% last year, buoyed by increased foreign direct investment and manufacturing.

Hungary's currency also rose on speculation the country's central bank will follow the shift by Slovakia by changing the band in which the forint is allowed to trade. „It makes it easier to move the band or abandon it completely,” said Raffaella Tenconi, an emerging-markets economist at Dresdner Kleinwort in London. Prime Minister Ferenc Gyurcsány said in a March 5 interview with the Napi Gazdaság newspaper that the central bank has proposed abandoning the band several times. The yield on Poland's 5.25% bond due October 2017 fell to 5.18%. The yield gap, or spread, over the similar maturity German bond narrowed to 127 basis points. Hungary's 6% bond yield due October 2011 fell to 10-week low at 7.29% in Budapest. The spread over the similar maturity German bond slid 22 basis points to 324 basis points. (Bloomberg)