BUDAPEST: The leu extended its recovery on Tuesday after its sharp fall during mass protests last week, outperforming other Central European currencies as Romania's healthy growth outlook offset uncertainty surrounding public calls for the government to quit.
The leu strengthened 0.3 percent to 4.4919 against the euro as the Romanian central bank kept its interest rates unchanged on Tuesday. Most analysts expect interest rates to start to rise around the end of 2017.
Elsewhere, Hungary's forint and the Polish zloty firmed marginally.
The Romanian currency hit 7-month lows at 4.554 last week after a government decree to decriminalize some graft offences unleashed the biggest mass protests since the collapse of Communism in 1989.
It rebounded after the decree was repealed on Sunday, but smaller protests against the one-month-old leftist government persist. While its majority in parliament is expected to help it survive a no-confidence vote on Wednesday, the president piled pressure on his prime minister with a stinging attack.
"The government continues to push its limits," Raiffeisen analyst Stephan Imre said in a note.
Analysts said forecasts of robust economic growth, seen near 4 percent this year, was supporting the leu, analysts said.
"Economic growth is fundamentally strong and the budget is loose," said Gabor Dunai, analyst of OTP Bank.
"That is expected to accelerate inflation and if that is true, the central bank could start to normalize (lift) interest rates later this year," he said.
Analysts said central Europe's strong growth outlook and relatively high yields has so far shielded its assets from the market jitters rippling through markets ahead of unpredictable elections in France, Germany and perhaps Italy.
A Reuters poll published on Tuesday showed the Czech crown could surge almost five percent against the euro in the next 12 months, well outperforming Central European peers, as the central bank is seen removing its cap on the crown's value.
"There are big political risks both in America and the euro zone right now and relative to that (Central Europe) looks quite stable now," said Erste analyst Gergely Urmossy, referring to upcoming elections in France and Germany.
Separately, German Chancellor Angela Merkel's visit to Warsaw on Tuesday has raised hopes of a thaw in relations, amid signs Poland's conservative rulers are keen to repair the co-operation essential for European Union (EU) attempts to handle economic and political problems ahead.
Hungarian and Czech December industrial output figures were below expectation, but analysts said output could still pick up across the region this year.
In light of a plunge in industrial output in Germany, the region's biggest export market, Hungary's 0.5 percent annual decline "can be regarded as a positive surprise", said ING analyst Peter Virovacz in a note.
One Budapest-based trader said regional currencies may also benefit from the closing of some selling positions opened in the past weeks due to expectations for a surge of the dollar.
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