Eastern European countries poised to revalue currencies

Rising inflation, strong growth and the return of an appetite for risk are pumping up Eastern European currencies, leading investors to speculate that some governments may revalue them.

Slovakia, Ukraine and Russia may all revalue their currencies this year to keep price pressures under control. A stronger currency would help reduce inflation by lowering the costs of imported goods.

Slovakia, where inflation is at a 17-month high of 4.3 percent, received approval last week to join the euro zone in 2009 and is widely expected to revalue its currency within the exchange rate mechanism, ERM2 - the waiting room for the zone - before then.

While there are local factors in play, higher-than-average current account positions in several Eastern European countries have attracted foreign capital, creating upward pressure on the currencies. The current account is the broadest measure of trade.

"Countries which have a very, very strong balance of payments and a spike in inflation have to accept the idea of currency appreciation," said Abdallah Guezour, an emerging markets fund manager at Schroders Investment Management.

Slovakia is running a current account surplus and Russia is expected to have a $74 billion surplus this year.

Rising food prices, which have occurred globally, have hit Eastern Europe particularly hard, lifting inflation. "Food prices are the real fundamental problem driving inflation in developing countries," said Michael Ganske, head of emerging markets research at CBCM. "They have a higher percentage of food prices in the basket. The further east you go, the bigger the problem becomes."

Eastern Europe's transition to a market economy and its high levels of investment from the euro zone have put national economies in a much stronger position.

Slovakia is the only East European country in the European exchange rate mechanism. Slovakia's currency, the koruna, is already at levels where many analysts see a revaluation likely - around 32 to the euro, about 10 percent above its central rate in ERM2, from which it can fluctuate by 15 percent.

(K.Katuscakova)