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Slovak crown seen edging down as 1998 draws to close

The Slovak crown should continue its gradual decline against hard currencies as the year draws to a close, but dealers maintain that a sharp fall is unlikely provided trading is quiet.
Developments in the neighboring Czech Republic, where the government collapsed during the November 29-30 weekend, prompting an initial bout of selling against the mark, would remain the main factors influencing also the Slovak currency, the dealers said. "The Czech crown moves will probably retain the strongest influence on the Slovak crown through the end of the year," said Dušan Svitek, a forex dealer with Slovenská Sporiteľňa.
Unlike its Czech counterpart, pegged to a currency basket made up of 70 percent German marks and 30 percent U.S. dollars, the Slovak crown's basket consists of 60 percent marks and 40 percent dollars. During the week the Slovak crown fluctuated at around 19.5 against the mark and around 34.6 against the dollar.

The Slovak crown should continue its gradual decline against hard currencies as the year draws to a close, but dealers maintain that a sharp fall is unlikely provided trading is quiet.

Developments in the neighboring Czech Republic, where the government collapsed during the November 29-30 weekend, prompting an initial bout of selling against the mark, would remain the main factors influencing also the Slovak currency, the dealers said. "The Czech crown moves will probably retain the strongest influence on the Slovak crown through the end of the year," said Dušan Svitek, a forex dealer with Slovenská Sporiteľňa.

Unlike its Czech counterpart, pegged to a currency basket made up of 70 percent German marks and 30 percent U.S. dollars, the Slovak crown's basket consists of 60 percent marks and 40 percent dollars. During the week the Slovak crown fluctuated at around 19.5 against the mark and around 34.6 against the dollar.

But more significantly, for the second time in its short history, Slovakia's currency was stronger than its Czech counterpart. And since the two economies are tied together through rich trade and business relations, selling to each other about a quarter to a third of their respective exports, the slumping Czech crown pulled down its Slovak sister.

The twin currencies' natural pegging showed immediately, as the Slovak crown's decline came on the heels of the Czech crown's fall, which was initiated both by the downgrading of the country's credit rating to BBB-plus from A-minus by the IBCA and by the political crisis.

During the week following the Prague turmoil, the Slovak currency has been traded at a three-month low, between -2.0 and -2.5 percent on the depreciation side of its basket parity.

Some currency dealers predicted that the Slovak crown would weaken further by the end of the year, but that it should find support when reaching a limit of -3.0 percent on the depreciation side of its basket.

"It seems that a slight selling mood will prevail for the [Slovak] crown until the end of the year, pushing the currency slightly lower," said one dealer from a foreign bank. "But trading should not be very active as foreigners will probably not want to open any new positions on this market by the end of the year, so this should prevent the crown from radical falls."

On the other hand, dealers warned that in order to maintain Slovak producers' competitiveness, the Slovak central bank should prevent a radical appreciation of the Slovak crown against the Czech currency.

"We will more or less follow the Czech crown's moves in the near future," said Richard Brza of ČSOB Bank. "It seems it would not be very good for our macro-economic situation if the Slovak crown gets too much stronger than the Czech crown."

"If nothing significant happens with the Czech crown, and provided that foreigners are not very active on the Slovak market... the crown should not fluctuate too much by the end of the year, hovering between -2.00 and -3.00 percent [against the midpoint]," Brza added.

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