BUDAPEST: Central European currencies eased early on Wednesday, with concerns over the start of US monetary tightening, the fragile situation in Ukraine and prospects of further rate cuts in the region taking their toll on local markets.
Investors fear fallout from the conflict in Ukraine could prompt some central banks in central Europe to loosen policy further to offset risks to growth, despite the prospect of rising rates in the United States.
Concerns the Federal Reserve might raise interest rates earlier than expected, a strengthening dollar and rising US treasury yields are all working against emerging Europe's riskier assets at the moment, analysts said.
"The movements of the past two days showed what we can expect in global markets as we approach the turnaround in US rate policy," analysts at CIB Bank in Budapest said in a note.
"Similarly to the start of tapering, the first rate increase in the US can be preceded by a rise in volatility and waves of capital withdrawals from riskier assets."
At 0729 GMT, the forint was down 0.3 percent at 317.10 versus the euro, trading close to its weakest levels since January 2012, and the Polish zloty also eased by 0.2 percent. By 0928 GMT the currencies had recouped some of these losses and both the forint and zloty were flat, while the leu was down 0.2 percent.
Polish rate setter Jerzy Osiatynski told Reuters on Tuesday that the central bank was likely to cut interest rates in October to help Polish exporters remain competitive after the European Central Bank eased policy last week.
The Polish central bank held rates at 2.5 percent in September and said it would begin cutting them if forthcoming data confirm economic activity is weakening.
In Hungary, the central bank has pledged to keep rates at a record low of 2.1 percent until the end of 2015.
Earlier EU sanctions against Russia over its involvement in the Ukraine conflict have already started to drag on central European economies and their main export market, the euro zone.
The European Union adopted new sanctions against Russia on Monday but delayed enforcing them to leave time to assess whether a ceasefire in Ukraine is holding. EU ambassadors will probably discuss the issue next on Wednesday.
In Hungary, investors are also closely following how the government will make banks pay for past charges on loans which the authorities and a top Hungarian court found were unfair.
A senior ruling party lawmaker said the government would submit a proposed law on Friday specifying details of how banks will make mandatory reimbursements to loan clients.
These refunds could cost 3 billion euros to the bank sector according to central bank and government estimates.
The expected losses have weighed on bank stocks such as the country's biggest lender OTP, which fell 1.9 percent on Wednesday, underperforming the wider Budapest market.
"There are a series of factors at the moment that are, so to say, not supportive for the forint," a dealer in Budapest said.
The government also plans to convert the huge stock of foreign currency loans, which households took out mostly prior to the 2008 crisis, into forints next year, which is also expected to put strain on the forint.
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