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March 11th 2005

Central European currencies enjoy sudden strength

Central European currencies have been aberrantly strong of late.  The Polish zloty has appreciated more than 20% against the Euro this year alone. Additionally, the currencies of Hungary, Slovakia, and Czechoslovakia have each appreciated more than 8% against the Euro, a currency that has itself appreciated by over 10% against the dollar. What is responsible for the sudden strength of Central European currencies? The answer is a combination of low interest rates and high economic growth.

Investors have been pouring money into Central European equities, which offer the high returns characteristic of a developing economy. If this were not enough, creditors have been all too eager to lend money to buy Central European government bonds. Investors have been looking for an alternative to EU debt, which pays interest at a negative rate, adjusted for inflation. Spurned by interest rates of over 8%, creditors have sold EU bonds and snatched up ‘CU’ bonds.  Moreover, investors do not regard Central European debt as incredibly risky, as EU is soon expected to extend membership to these nations.

Subsequent cuts in interest rates have not had any effect on deterring foreign capital inflows. Central European governments have begun to worry that the sudden strength of their domestic currencies, could have a stultifying effect on their respective economies, which are largely driven by exports. They will most likely accelerate the pace of interest rate drops, to prevent any such slowdown.

Read More: Central European currencies: Too strong for comfort

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Posted by Adam Kritzer | in Exotic Currencies | No Comments »

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