BUDAPEST: Central Europe's most liquid currencies and some of its government bonds firmed on Monday after efforts to form an Italian government with a eurosceptic economy minister collapsed over the weekend, which was seen as market-positive.
The zloty gained 0.3 percent to 4.2967 per euro by 0840 GMT, breaking through the 4.3 line, while the forint gained 0.1 percent to 318.90.
The Italian developments gave some support in early trade to the euro against the dollar, a cross that is being closely watched in the European Union's eastern markets after a sell-off this month driven by a rally in the dollar and US debt yields.
The region's main currencies continue to trade near multi-month lows and regional markets remain fragile, market participants said, with the euro retreating after initial gains behind the 1.7 line against the dollar.
Regional stock markets were mixed.
"It is possible that the relief will be fragile as after the Italians, storm clouds are gathering around the Spanish government as well," Erste analysts said in a note.
Spanish Prime Minister Mariano Rajoy could face a no-confidence vote in Parliament.
Poland's 10-year government bond yield dropped 2 basis points to 3.175, while Hungarian bond yields were flat.
"With populist parties so strong in Italy, I do not know what a new election could help there," one Budapest-based fixed income trader said.
Hungary's government bond market, a big regional outperformer in the past year, has taken the worst hit from this month's emerging market sell-off.
Last week's retreat in Hungarian yields may continue, and the forint could drift further off 23-month lows versus the euro, if the dollar does not resume its rally, dealers and analysts said.
Polish bonds continued to recover.
May inflation figures for Poland on Wednesday could show a rise in the annual rate from 1.6 percent in April, but the figures are unlikely to change the bank's stance of keeping monetary conditions loose, analysts said.
A retreat in global crude prices is helping keep inflation expectations moderate, they said.
The Czech crown, often more heavily influenced by expectations for the timing and size of central bank (CNB) rate tightening than global factors, eased 0.1 percent against the euro.
It gave up some ground after a rise on Friday when CNB Governor Jiri Rusnok said its weakness may bring forward the next interest rate hike.
The leu, a currency more closely managed by the central bank than its main regional peers, eased slightly in international trade, with Romanian markets closed for holiday.
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