REUTERS

PRAGUE THE Serbian dinar plunged to a record low against the euro on Tuesday as a bid by the government to increase its control over the central bank prompted a ratings cut from Standard & Poor’s.

The Romanian leu extended gains, underpinned by a signal of support for the currency from the central bank, while other emerging European currencies drifted lower.

Hungary’s forint dipped after growth in June industrial output lagged forecasts.

Stock markets across the region snapped a two-day rise, with losses led by Bucharest, down 1 percent on the day,while Hungarian and Polish bond yields rose.

The dinar hit 119.23 per euro after the rating cut to BB- with S&P, which cited risks to central bank independence.

By 1315 GMT the currency had clawed its way back to 118.66.

On Monday a senior Serbian lawmaker from the ruling coalition was appointed central bank governor and a law adopted to increase government control over monetary policy.

Both the International Monetary Fund and the European Union - which Serbia hopes to join at some point - criticised the legislation.

Three of five ordinary members of the bank’s Council of Governors resigned on Tuesday, after the governor and deputy resigned the day before, leaving a meeting due to take place on Thursday up in the air. “I wouldn’t see them (the central bank) making any decision( on Thursday), but this will be more a get-together,” said Martin Stelzeneder, a country analyst at Raiffeisen in Vienna.

“The dinar will be under pressure due to the political situation. If this calms down, the main topic will be regional sentiment. Volatility will remain high... We may see more (euro versus dinar) highs in the fourth quarter.” Elsewhere in emerging Europe, assets - highly dependent on the euro zone for trade and banking - have risen in recent weeks as investors chase higher yields.

The leu, however, missed out on the gains due to a bitter political feud between Prime Minister Victor Ponta’s leftist government and rightwing President Traian Basescu which has paralysed policymaking and raised doubts over Romania’s IMF standby aid deal.

The currency hit a record low last week and has lost 2.1percent since July 1
But the country’s central bank capped the amount it gave banks at a repo auction on Monday in a move some traders said was a signal it would not tolerate too much leu weakness.

Some said on Monday the bank had intervened to prop up the currency. “The leu is supported by the results of the repo auction from yesterday,” a Bucharest-based trader said.

“Interest rates are higher after the central bank limited the auction to a maximum of 6 billion lei ($1.63 billion).” By 1315 GMT, the leu had gained 0.6 percent to4.545 per euro, rebounding more than 2 percent from a record low hit on Friday.

But analysts said the gains may be short-lived as Romania's political crisis is expected to drag on at least until a parliamentary election in the fall.

“Political tension has escalated significantly and no end can be seen on the near-term radar, putting the country on a dangerous path,” ING said in a research note, adding it expected the leu to fall to as much as 4.85 by year-end.