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Tuesday, December 11, 2007

Rising Forint

Following on from my extensive analysis yesterday, I couldn't help having my attention drawn to the news today that Hungary's forint is once more gaining ground versus the euro after inflation accelerated for a second month, reinforcing speculation the central bank won't lower the European Union's highest interest rates. This really is a crazy situation when more inflation effectively strengthens your currency. You lose out both ways, since your prices rise, and your goods become more expensive in oreign currency.

Hungary's inflation rate climbed to 7.1 percent in November, from 6.7 percent a month earlier while the central bank's main interest rate is currently at 7.5 percent.

``Before the inflation report some traders bet on a rate cut, but today's data boosted belief the central bank won't reduce borrowing costs,'' said Jaroslaw Janecki, chief economist at Societe Generale in Warsaw. ``There is even some speculation we may see a rate rise and this is supportive for the forint.''

The forint rose to 251.80 per euro by 11:05 a.m. in Budapest today, from 252.00 yesterday. The currency is now 4 percent above its 10-month low of 262.38 per euro reached on Aug. 17.

The central bank left the two-week deposit rate unchanged at the November meeting as policy makers pledged to focus on ``cooling'' inflation expectations to prevent the effects of surging food and fuel prices from spreading across the central European economy.

Here it is a case of this way you lose, and that way you lose too.

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