Latvian currency hits weakest end of band vs euro

Reuters Business and Fianance
Patrick Lanning
October 1, 2008

RIGA, Oct 1 (Reuters) – Latvia’s lat currency, which has steadily drifted lower in recent weeks, hit the weakest end of its 1 percent band against the euro on Wednesday for the first time since March 2007.

The lat is pegged to the euro at a central rate of one euro to 0.7028 lats under a currency board-style system. Its weakest permitted end of the band is 0.7098 and the strongest is 0.6958.

It closed on Wednesday at 0.7087/99 .

“It is likely that this week the central bank will buy lats,” Nordea Markets analyst Andris Larinsh wrote in a note.

Central bank spokesman Martinsh Gravitis said the central bank had not bought any lats on Wednesday.

The bank carries out so-called passive intervention as anyone wanting to sell lats at the weak end of the band goes to the bank, which buys them.

Larinsh said lat market interest rates would have to rise if other buyers of lats were to appear and expected it would stay near the weakest end of its band against the euro for a while.

One trader said sales of lats by two large foreign players and some locals had been behind the currency’s slide to the weakest end of its band against the euro.

The lat was last at these levels in the early months of 2007 following a devaluation rumour in February of that year and then ratings downgrades at a time of fears of economic overheating. It hit the weakest end of its band in March 2007.

Now the economy has turned sharply weaker after the Scandinavian-owned banks which dominate the banking sector turned off the credit taps. Latvia’s second quarter gross domestic product growth was a tiny 0.1 percent.

Latvia’s top banks are Swedbank (SWEDa.ST: Quote, Profile, Research, Stock Buzz), locallly-owned Parex Bank and SEB (SEBa.ST: Quote, Profile, Research, Stock Buzz).

— Reporting by Patrick Lannin, editing by Swaha Pattanaik