CEE MARKETS 2-Forint rally pauses for now, other FX down

                                
 * Rally on HUF pauses, fiscal policy key for unit
                                
 * Polish zloty lags peers, may strengthen further on
                                
 * Bond market quiet, awaits Polish 2-yr bond auction
                                
 
                                
 (Adds fixed income, detail)
                                
 WARSAW, Oct 5 (Reuters) - Hungary's forint paused for breath
in its month-long rally on Tuesday, but investor hopes for
tighter fiscal policy could soon lift the unit back to levels
last seen at the start of May, dealers said.
                                
 Other currencies in emerging Europe eased amid a lack of
fresh regional news.
                                
 The forint <EURHUF=> was virtually flat against the euro at
273.5 by 0850 GMT. It briefly hit five-month highs on Monday
after the ruling centre-right Fidesz party consolidated its hold
on power in local elections at the weekend.
                                
 "The forint is definitely trendy nowadays and since
investors believed in the government's promises (to slash the
deficit), the level of 271 against the euro in coming days is
very likely," said one Warsaw-based dealer.
                                
 He added that there was now more activity in regional trades
involving going long on the forint and shorting the Polish
zloty.
                                
 "The zloty is lagging behind (regional peers) and I expect
it to move in a range of 3.94-3.98, but it should rebound
further on, maybe at the year-end," the dealer said.
                                
 The zloty <EURPLN=> weakened 0.4 percent against the euro
while the Czech crown <EURCZK=> eased 0.1 percent and the
Romanian leu <EURRON=> was flat.
                                
 A member of the Polish central bank's Monetary Policy
Council (MPC), Andrzej Bratkowski, told Reuters on Monday he
believed the zloty was undervalued but that he did not expect
any sharp appreciation due to Poland's fiscal difficulties and
the external environment. [ID:nLDE6931GE]
                                
 Polish bonds were almost flat ahead of Wednesday's new
2-year benchmark bond auction.
                                
 Regional stocks were mixed, with Warsaw's WIG20 <.WIG20>
edging 0.1 percent higher and Prague's PX <.PX> easing 0.3
percent.
                                
 
                                
 FISCAL POLICY KEY
                                
 Investors began to favour the forint last month when the 
Hungarian government confirmed plans to cut next year's budget
deficit to below 3 percent of gross domestic product. 
                                
 The market is awaiting fiscal tightening plans for next year
which should be released this month. Some analysts, however,
have doubts that the centre-right government will be able to
make the neccessary cost cuts.
                                
 Major Hungarian daily Magyar Nemzet reported on Monday that
Economy Minister Gyorgy Matolcsy, who is in charge of the state
budget, could be replaced in the near future, but said it was
unclear at this stage whether a possible replacement would lead
to any significant policy change. [ID:nLDE6930SU]
                                
 "If Matolcsy were indeed to be replaced with a more
orthodox policy maker like, for example, former central bank
governor Zsgimond Jarai or Mihaly Valga -- who has long been an
economic adviser to Prime Minister (Viktor) Orban -- then we
believe it could reduce political-financial risk in Hungary,"
analysts at Danske Bank wrote in a note.
                                
 Elsewhere, in Romania markets are watching the political
scene, with the opposition set to file a no-confidence vote
ahead of an IMF mission to review an aid deal at the end of
October.
                                
 On Wednesday, the Constitutional Court is expected to decide
on a pension reform bill that is a key part of the deal.
--------------------------MARKET SNAPSHOT--------------------
Currency                    Latest   Previous Local    Local
                                
                                  close    currency currency
                                
                                           change   change
                                
                                           today    in 2010 
Czech crown      <EURCZK=>  24.523   24.497   -0.11%   +7.32%
Polish zloty     <EURPLN=>   3.978    3.961   -0.43%   +3.17%
Hungarian forint <EURHUF=> 273.48   273.5     +0.01%   -1.14%
Croatian kuna    <EURHRK=>   7.292    7.291   -0.01%   +0.24%
Romanian leu     <EURRON=>   4.275    4.274   -0.02%   -0.88%
Serbian dinar    <EURRSD=> 105.81   106.19    +0.36%   -9.38%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond   CZ2YT=RR   +1 basis points to  90bps over bmk*
7-yr T-bond   CZ7YT=RR    0 basis points to  +100bps over bmk*
10-yr T-bond   CZ9YT=RR   +3 basis points to  +110bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond   PL2YT=RR    0 basis points to  +384bps over bmk*
5-yr T-bond   PL5YT=RR   +8 basis points to  +360bps over bmk*
10-yr T-bond PL10YT=RR    -2 basis points to  +321bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1050 CET.
Currency percent change calculated from the daily domestic 
close at 1600 GMT.
                                
 
                                
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 (Reporting by Reuters bureaus, writing by Dagmara Leszkowicz;
editing by Stephen Nisbet)