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Home » Archives » Business

Further gains likely for crown

Credit crisis buoys currency to records against dollar, euro

By Victor Velek
Staff Writer, The Prague Post
September 26th, 2007 issue

Thanks to fears of a credit crunch following the worldwide subprime mortgage crisis, the Czech crown has been hitting all-time record highs against both the euro and U.S. dollar.
Freed from currency speculations that have fallen off since the crisis began, the crown could make even further, gains ahead.
The crown has been rising since August. At the beginning of September, it began trading under the 20 Kč mark to the dollar for the first time, and, Sept. 24, following the U.S. central bank’s interest-rate cut by several days, the crown increased to a record 19.48 Kč per dollar. Days earlier, it set a new record against the euro, closing at 27.38 Kč.
“The crown is regaining its proper standing,” says Vladimír Pikora, chief economist of Next Finance.
Paradoxically, the reason behind the rising crown is the subprime mortgage crisis, which dealt a heavy blow to financial markets in the United States and elsewhere, according to Pikora.
“In the spring, carry trades pushed the crown down,” he says. “The mortgage crisis has made such speculations very volatile and risky.”
“Earlier this year, there were good conditions for carry trades with the crown,” agrees Komerční banka analyst Jan Vejmělek. “The interest rate in the Czech Republic was low.”
Analysts don’t expect the crown will continue to hold up as a vehicle for carry trading, which sees speculators using loans from low-interest currencies that are then exchanged for investments in high-interest denominations. And this decline should outlast the risk-adverse conditions created by the mortgage crisis.
“The Czech National Bank has set about increasing the interest rate, while in the United States the interest rate has been cut and the euro zone has remained the same,” says ČSOB analyst Jan Bureš.
The current record-hitting period marks a return to the “standard situation when the crown exchange rate follows hard economic indicators,” Vejmělek says. The long-term strengthening has been caused by the growth of Czech exports and labor productivity, Bureš adds.
But the strong crown, which allows locals to purchase foreign goods more cheaply, has brought woes to Czech exporters, as it makes their products more expensive, especially in the dollar zone.
“This long-lasting rise has been a big blow for exporters,” says Jiří Grund, head of the Czech Exporters Association. It also curbs spending of some tourists, especially Americans, visiting the country.
Analysts assume that there is still room for further strengthening, but don’t expect the barrier of 27 Kč per euro to be broken this year, Bureš says.
In the short-term, the dollar is also likely to keep falling against the euro and crown, experts predict. Within three months, “the dollar might drop to $1.45 per euro but it will hardly fall further,” Pikora says.
And in the long term it will recover, Bureš says, “because it is undervalued to the euro.” It is quite possible that the records currently being set by the crown against the dollar now or later this year could be the highest the currency goes for a long time, he adds.

Victor Velek can be reached at vvelek@praguepost.com


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