BUDAPEST: The Serbian dinar rose to its strongest levels against the euro in 3 1/2 years on Monday, continuing to outperform Central European peers as Belgrade's treasury bond auctions boost demand for the currency.
The rally went on even though the Serbian central bank has repeatedly sold the dinar in the market this month, and Friday's data showing a decline in inflation did not support monetary tightening.
On Monday Prime Minister Ana Brnabic pledged a new deal with the International Monetary Fund by mid-2018 that will focus on reforms to boost economic growth.
"The dinar will likely continue to strengthen until after municipal elections in Belgrade (on March 4) which will serve the ruling coalition to cement power," one Belgrade-based dealer said.
The dinar firmed 0.1 percent against the euro to 117.9 by 0915 GMT, while most other units in the region eased mildly.
Lower inflation has a downbeat impact on Serbian government debt yields, Raiffeisen analyst Ljiljana Grubic said in a note.
"We still maintain (our forecasts for) the key (Serbian central bank) rate intact at 3.5 percent year-on-year, but will closely look at inflation sentiment," she added.
Elsewhere, the forint touched its weakest levels against the euro this year, at 313.29, ahead of a meeting of the Hungarian central bank on Tuesday. It is expected to keep interest rates on hold at record lows.
But it may suggest a rise in its offer at its upcoming interest rate swap auction, which injects cheap liquidity into markets - or further monetary easing, Raiffeisen analyst Gintaras Shlizhyus said.
"The market remains sceptical about (the bank's) ability to hold loose policy bias in the absence of material substance, so only verbal interventions may fail to work this time," he said.
In Warsaw, the zloty firmed 0.1 percent to 4.1697 against the euro, regaining some ground after a fall last week as dovish Polish rate-setter Eryk Lon warned the zloty's strength was starting to hurt exports.
Hawkish central banker Kamil Zubelewicz told Reuters that policymakers with bad memories of deflation may not vote for a rate hike until late 2019 even if inflation temporarily surges to as high as 4 percent.
Central European states including Poland are expected to report upbeat February manufacturing and fourth-quarter GDP figures in the next days.
"But for the zloty the most important thing should be performance of risk-free interest rates on global markets," mBank analysts said in a note, adding that a rise in yields could cause a zloty retreat.
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