Czech crown weakest since July 2010 on euro crisis

Aktualne.cz
15. 11. 2011 13:06
Czech currency may further debilitate if eurozone crisis deepens, say experts
Czech banknotes
Czech banknotes | Foto: Reuters

Prague - The Czech crown is trading at its lowest level since July 2010.

This morning, the euro traded at CZK 25.70 and the US dollar at CZK 18.96, according to Patria Online.

"The weakening of the Czech crown is not related to the development of the Czech economy, it is the fear of future developments in the financial markets that is weighing on it. Today, trying to predict the future Czech crown exchange rate means predicting when and how will end the eurozone debt crisis," said Patria Finance analyst David Marek.

Read more: Czech economy has good reasons to fear Greek default

According to Marek, if a credible way of solving the debt crisis is found, the CZK/EUR exchange rate may return to 24-25. If not, it can reach as much as 28-30.

Nervousness in financial markets

Raiffeisenbank analyst Michal Brožka believes that the exchange rate will remain very volatile for the rest of 2011.

According to experts, the weakening of the Czech currency is caused by several reasons. Currently, the extreme nervousness is reigning over the markets, especially because of the ongoing political uncertainty in Italy.

However, some domestic economic developments are relevant as well. For example the downward revision of the 2012 growth estimate announced independently by the Czech Finance Ministry and the Czech central bank.

Read more: Czech 2012 GDP growth estimate revised from 2.5 to 1%
Read more: Czech "second dip" internal, unrelated to euro crisis

Fresh economic data coming from the eurozone, such as a recent drop in industrial output, fail to lift the gloomy mood.

Read more: Czech firms losing their position in German market

At the same time, the weakening Czech crown is projecting a negative influence of its own, especially in terms of higher inflation. The latest data show that the rate jumped to 2.3 percent.

It is for the first time in 2011 that the inflation rate broke the 2 percent barrier. This year's low inflation was of course an effect of the strong Czech crown that made imported goods cheaper.

A weaker Czech crown may make some products more expensive, even though the low consumer demand in the Czech Republic will likely prevent any significant price hikes, as it has been doing so far. 

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