Hungary's forint eased against the euro after recovering nearly 4 percent from Thursday's record low even as its government struck a more conciliatory note in talks with international lenders while the Egyptian pound sank to new lows despite the expected start of talks with the International Monetary Fund this week.
Data showing Germany gross domestic product shrinking quarter-on-quarter in last three months of 2011 refocused investor attention on the depth of the challenges faced by the euro zone, eroding some of the recent market gains prompted by signs of economic revival in the U.S. [ID:nL6E8CB1DY]
"We are still in fairly illiquid markets and a lot of investors are being quite tentative at this point. Europe is still the epicentre of the market's concerns," said UBS strategist Manik Narain.
"The market is concerned ahead of the bond redemption that the Greek government will face in March. There is risk of a coercive debt restructuring. It's a sword of Damocles hanging over Europe and people are being quite cautious," he said.
After a nearly two-percent gain in the previous session, the key emerging equity benchmark <.MSCIEF> stayed near Tuesday's one-month highs, easing 0.1 percent by 1200 GMT while emerging hard-currency debt <11EMJ> tightened two basis points.
Emerging European shares <.TRXFLDEEPU> were mostly unchanged though Russian shares <.IRTS> dipped over 1 percent after a three-session advance that took them to a month's high.
Turkish shares <.XU100> rose for their second straight session while Hungarian stocks slipped 1.3 percent <.BUX> after rising some five percent in last two sessions.
TURKISH SURPRISE
The lira firmed to its strongest level versus the dollar <TRY=> since the end of last year, with data showing Turkey's current account deficit falling year-on-year in November for the first time since 2009 offering the currency a fillip.
Central and eastern European currencies were weaker against the euro with the Polish zloty down a touch after rising three consecutive sessions <EURPLN=>.
Hungary's forint slipped nearly 1 percent from Tuesday's two-week peaks <EURHUF=>. The unit has recovering nearly 4 pct since Thursday's record low but investors remain wary despite a slightly more conciliatory stance taken by Budapest towards talks with the European Commission and the IMF for funding assistance. [ID:nB3E7NG01E]
The EC said it would take steps against Hungary as it has not made sufficient progress in tackling its excessive deficit. [ID:nB5E7NR00P]
"Today and tomorrow we are looking for comments from the IMF and EC regarding potential comments about conditionality of the external assistance. We stick to our view that forint will likely benefit the most as the market is still short," said UniCredit in a note.
Meanwhile, the start of IMF talks did little to aid the Egyptian pound, which traded at yet another record low against the dollar <EGP=>.
Talks are expected to begin in Cairo this week on a possible 18-month $3 billion loan to ease immediate balance of payment needs after months of political turmoil. [ID:nL1E8CA5DV]
"Expect further weakness in the foreign-exchange market until more foreign funds begin to flow. Meanwhile, the currency is coming under increasing pressure. While it has only lost 1.1 percent since mid-Q4 2011, this compares to a fairly flat performance after the initial shock of the uprising in Feb 2011, given intervention by the Central Bank of Egypt," said Societe Generale in a note.
"Such intervention in the forex market coupled with a deteriorating balance of payments position has lead to a large slide of $18 billion in reserves, leaving import cover now at only 3.7 months," it added.
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