Updates prices after FX gain, Czech auction

By Jason Hovet

PRAGUE, March 22 (Reuters) -Central Europe's currencies recovered groundon Wednesday, with global investors' eyes turned to a U.S. Federal Reserve meeting later in the day to assess the dollar's strength, while the recent drop inyields depressed demand in a Czech auction.

Market sentiment has improved since the rescue of Credit Suisse by Swiss rival UBS jolted investors at the beginning of the week, causing Hungary's forint to sink to an 11-week low and stocks to sell off, especially among banking shares.

On Wednesday, shareswere mixed, with Warsaw .WIG20 and Prague .PX inching down.

Currencies reversed course in the afternoon when the U.S. dollar weakened, boosting appetite for riskier assets.

The forint was 0.3% higher at 388.45 per euro at 1326 GMT, havingswung from as strong as 380 last week to beyond the sensitive 400 level on Monday.

The Polish zloty EURPLN= was also halfway from its trading range seen since last week, steady onthe day at 4.687 tothe euro.

The U.S. Fed's committee(FOMC) will be weighing still high inflation with the recent bout of banking market turmoil caused by Credit Suisse and the implosion of California-based Silicon Valley Bank.

"Market participants' dovish expectations will be confronted with the latest forecasts of FOMC members regarding the target level of the federal funds rate at the end of this and next year," analysts at Polish bank PKO said.

"They may turn out to be much more balanced than the market expects, and the possible lack of a clear valuation of interest rate cuts this year in the dot plot would favor the strengthening of the dollar against high-yielding EM currencies, including the zloty."

Signals of a possible U.S. rate cut this year would boost the zloty and others in the region, PKO said.

The latest bout of market turmoil undid some of the currency gains seen already this year, with the forint sitting around a 10-month high earlier in March and the crown touching analmost 15-year peak as well.

Bond yields have also dropped but ticked higher on Wednesday.

A Czech bond auction drew more tepid demand than usual, with bids concentrated on a five-year bond rather than longer-dated paper. The auction produced an average yield of 4.583% on the five-year, down from trading above 5.30% on secondary markets at the start of March. CZ1006696= CNB08

The recent fall in yields "might have prevented some people from buying at these levels," a trader said.

The ministry has slowed its borrowing pace although has compensated with switch auctions in secondary markets, which have totalled 29.5 billion crowns so far in 2023.

** Click here for an interactive graphic:

Reporting by Jason Hovet in Prague, Alan Charlish in Warsaw and Krisztina Than in Budapest; Editing by Maju Samuel

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