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The European Union's eastern nations are stepping up market interventions to protect their currencies from a selloff triggered by Russia's invasion of Ukraine.
The Czech central bank sold foreign currency on the market on Friday, joining the monetary authority in Poland, which intervened for the third time this week. Meanwhile, Hungary's forint tumbled to a record low against the euro despite Thursday's interest-rate hike.
The region's assets, especially the liquid, free-floating currencies of the biggest economies, have been vulnerable to risk-off sentiment which has dominated global markets since Russia was hit with sanctions for its war on Ukraine. Only the ruble has depreciated further than the forint, koruna and zloty following the invasion.
The war destabilized currencies just as a series of rate increases was boosting their outlook, according to Piotr Matys, an analyst at InTouch Capital Markets Ltd.
“East European central banks took decisive measures to raise interest rates in response to spiraling inflation,” Matys said. “If not for the war in Ukraine, the region's currencies would probably still be strengthening.”
Central banks from the region have hard currency to sell after amassing hefty reserves from more than a decade of EU transfers and strong growth, led by the Czech Republic's $175 billion pile that could cover more than a year of imports.
Described as “enormous” by central bankers in Prague, the reserve is a legacy of the country's Swiss-style currency cap from last decade, when policy makers tried to keep the koruna weak by selling the local currency on the market. The Czech National Bank said on Friday that tapping the stockpile “in the current exceptional situation is fully justified.”
The koruna advanced as much as 0.9% after the announcement and pared some gains later to trade at 25.67 to the euro at 5:02 p.m. in Prague. Deputy CNB Governor Tomas Nidetzky said the bank isn't focusing on a specific koruna level but that excessive weakness risked undermining its efforts to tame inflation.
“I have to say that the market reacted very quickly,” he told public television. “We will certainly discuss another rate increase at the next monetary meeting.”
Poland's interventions, which were confirmed by the central bank in a statement late in the trading day, only briefly reversed the zloty's drop, with the currency weakening 0.5% against the euro to 4.84. The forint lost as much as 3% before trading at 385.8 down 1.4% on the day.
Hungary's central bank said that as a rule it doesn't comment on potential foreign-exchange interventions. It affirmed, however, a statement from March 1 that it's “ready to intervene with all elements of its toolkit to ensure the stability of domestic financial markets.”
While Poland, Hungary and the Czech Republic have historically rarely intervened in currency markets, EU members Romania and Croatia, as well as non-EU nation Serbia, run managed-float regimes, where central banks regularly buy and sell on the market to keep the local currency in check.
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