BUDAPEST: The zloty gave up gains and the forint's losses deepened on Thursday as rising rate cut expectations overshadowed a victory for Poland's prime minister in a parliamentary confidence vote.
The Czech crown also weakened after the central bank suggested it may stick to its weak crown policy for longer.
Shares in Bulgaria's third biggest bank fell 18 percent after a ruling party lawmaker suggested another bank could be in trouble after a run on No.4 lender Corpbank last week.
Poland's zloty was flat at 4.151 against the euro, after rising to a one-week high earlier in the session after Prime Minister Donald Tusk won the confidence vote as Poland experiences its deepest political crisis for years.
Leaked conversations between senior officials embarrassed the government and sent the zloty to three-week lows last week.
May figures released on Thursday showed a slowdown in Polish annual retail sales growth to 3.8 percent, increasing chances that the Polish central bank (NBP), which will meet next week, will cut its record low interest rates further, analysts said.
"There is a clear risk that we might get outright deflation in coming weeks and one could certainly argue - as we have done for a long time - that the NBP should ease monetary conditions," Danske Bank said in a note. It said it still expected the bank to keep rates on hold next week.
DOVISH SIGNALS
Central Europe's most liquid currencies came under increased pressure after a downward revision to US economic growth data made investors less willing to buy riskier assets and pushed the region's reference currency the euro higher against the dollar.
The forint led losses, shedding 0.6 percent to trade at 308.55 per euro. It had been under pressure since Tuesday when the central bank cut its base rate for the 23rd month in a row to a record low of 2.3 percent.
"The shift in the euro/dollar cross caused a weakening of emerging market currencies, but the forint also had an earlier round of falls," one Budapest-based currency dealer said.
"The central bank gave a nice discount to banks in its first interest rate swap auction and many people read this as a signal for more rate cuts to come."
Earlier this year the central bank rejigged its monetary policy tool kit to channel funds from two-week bills into longer-term government debt.
It held its first auction of three- and five-year interest rate swaps on Thursday to help investors hedge bond buying. Its 40 billion forint ($177.78 million) offer attracted huge demand of 194 billion forints.
Hungary sold three-, five- and 10-year government bonds at another auction, with yields dropping from secondary market levels as demand was robust, mainly for five-year bonds.
"The bank made it clear with the pricing of the five-year IRS that it wants funds to go there and that also helped demand for the five-year government bonds," one Budapest-based fixed income trader said.
The crown eased 0.1 percent per euro after the Czech central bank kept its main rate on hold at a record low of 0.05 percent but said it was increasingly likely that it would end its policy to keep the crown weak later than early 2015.
The threat of deflation is reducing and the Czech economy is recovering but not quickly enough to make the central bank give up its "extremely dovish stance", Capital Economics analyst William Jackson said in a note.
Budapest's main stock index fell 1.5 percent, dragged down by oil group MOL. It fell as much as 6 percent, with traders citing press reports of an auction of up to 4.3 million MOL shares by unspecified owners.
Romania's leu firmed 0.1 percent after an initial public offering of a 51 percent stake in state-owned electricity provider Electrica was heavily oversubscribed.
Slovenia's stock index rose 2.5 percent, lifted by retailer Mercator, which rose almost 4 percent after a consortium of its owners said they agreed with Croatian rival Agrokor to complete Mercator's takeover.
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