By Carolyn Cohn
LONDON, May 15 (Reuters) - Rising inflation, strong growth
and the return of risk appetite are pumping up eastern European
currencies, leading investors to speculate about revaluations of
some of the region's currencies.
Slovakia, Ukraine and Russia may all revalue their
currencies this year to keep strong price pressures under
control.
Slovakia, where inflation is at a 17 month high of 4.3
percent, got the green light last week to join the euro in 2009
and is widely expected to revalue its currency within the ERM2
exchange rate mechanism -- the waiting room for the euro zone --
before then.
Ukraine's hryvnia has been allowed to rise about three
percent above its trading band as the country battles 30 percent
inflation and investors are speculating the Russian central bank
will allow the rouble to appreciate to curb inflation of over 14
percent.
While there are local factors in play, better than average
current account positions in several eastern European countries
have attracted foreign capital, creating upward pressure on the
currencies.
"Countries which have a very, very strong balance of
payments and a spike in inflation have to accept the idea of
currency appreciation," said Abdallah Guezour, an emerging
markets fund manager at Schroders Investment Management.
Slovakia is running a current account surplus and Russia is
seen having a $74 billion surplus this year.
FOOD ALERT
Rising food prices, a global phenomenon, have hit eastern
Europe hard, pushing up inflation.
"Food prices are the real fundamental problem driving
inflation in developing countries," said Michael Ganske, head of
emerging markets research at CBCM. "They have a higher
percentage of food prices in the basket. The further east you
go, the bigger the problem becomes."
This has fed into a widening interest rate differential
between eastern European interest rates and those of the U.S.
and euro zone, another upward factor for the currencies.
The weakness of the dollar, which has been at record lows
against the euro, has also boosted euro-correlated currencies.
Hungary's forint has risen 6 percent against the euro since
it dropped its 30 percent band earlier this year, and the
free-floating Czech crown and Polish zloty are also up 6 percent
against the euro this year.
The strength of eastern European currencies is in contrast
to the last time the dollar was weak, in 1992-1993. The
greenback's poor performance then coincided with the bumpy ride
of deregulation in a post-communist world, leading to successive
devaluations in countries such as Poland.
Eastern Europe's transition to market economies and its high
levels of investment from the euro zone have put these economies
in a much stronger position.
GREEN LIGHT
Slovakia is the only eastern European country in the ERM2
exchange rate mechanism. The crown currency is already at levels
where many analysts see a revaluation likely -- around 32 to the
euro <EURSKK=>, around 10 percent above its central rate in
ERM2, from which it can flucuate by 15 percent.
In Russia, a change of government with incoming president
Dmitry Medvedev is likely to lead to a revaluation as a way of
curbing inflation to help protect the new leader's popularity,
analysts say.
The central bank keeps the rouble stable against a dual
currency basket of 0.55 dollars and 0.45 euros.
"This has been largely counterproductive -- when you take
these kind of baby steps, it attracts more speculative inflows,
it puts even more pressure on the currency," said Guezour.
"The only policy which is going to work is to try to have a
very strong...strategy, to find the proper timing to let the
currency have a proper market adjustment."
Russia's central bank said on Wednesday it would begin daily
interventions in the rouble, which analysts said was designed to
create uncertainty and unravel recent strength in the currency.
Ukraine has a widening current account deficit. While this
may weaken the currency in the medium-term, the immediate battle
is to tackle 30 percent annual inflation, analysts say.
The hryvnia has moved out of its narrower trading corridor
of 5.0-5.06 per dollar <UAH=> and has even been allowed to trade
above the wider band of 4.95-5.25. But Ukraine's central bank
council has said there is no revaluation.
"The reality is that despite the statements of the central
bank, the corridor has already widened, it is not just a
one-off," said Ganske.
Elsewhere, widening current account deficits are also an
issue for the euro-pegged currency regimes of the Baltics and
Bulgaria, but analysts say these are at risk of devaluation,
rather than revaluation, to avoid a hard landing.
(Reporting by Carolyn Cohn)
