Europe's EM currencies best in 2012 The currencies of eastern Europe have emerged as the best performers of 2012 in the forex market, shrugging off both weaker growth in the eurozone and domestic funding issues as investors flocked to higher interest rates in Hungary and Poland. The Hungarian forint and the Polish zloty have both risen 11 per cent against the US dollar in the past 12 months, making them the strongest performing of the world's major currencies this year. Some currency investors have been caught out by the forint's move higher, with many selling the currency on concerns over the country's high levels of debt after Hungary failed to agree a funding deal with international lenders including the International Monetary Fund. Shorting the forint against the euro was the least profitable trade for Nomura's eastern Europe, Middle East and Africa strategists, for example. Some investors, including Amundi's currency team, also took short forint positions on the basis that the fundamentals of the Hungarian economy looked poor. In fact, the Hungarian forint rose alongside other emerging market currencies as many investors prioritised yield over fundamentals. Despite cuts this year, interest rates in Hungary are still 5.75 per cent, and 4.25 per cent in Poland, making them attractive to investors looking for yield. In the Czech Republic, headline rates are just 0.05 per cent. Meanwhile, Hungarian and Polish government bonds have rallied as fears of a eurozone collapse have abated. Poland's 10-year debt costs hit a record low last week. The Hungarian forint received another boost recently after Fitch, the ratings agency, upgraded its outlook for Hungary's debt in December from negative to stable. The zloty and the forint also belong to the few emerging market countries whose central banks were happy to allow their currencies to appreciate in the wake of monetary easing in the US. Some Asian and Latin American countries took steps after the Federal Reserve introduced a third round of quantitative easing in September to avoid the fallout effect on their own currencies and protect their exports. By contrast, Hungary and Poland have both borrowed large amounts in overseas currencies and have an interest in seeing their currencies strengthen, to reduce their repayment costs. "As both countries have borrowed massively abroad in the euro or Swiss franc for domestic demand, naturally they do not intend to let their currencies weaken and see their borrowing costs jump," says James Kwok, head of currency management at Amundi, who has had long positions in the Polish zloty but short positions in the forint and Czech koruna this year.