* Forint seen extending gains after April 25 election
* New Fidesz govt, c.bank likely to oppose more forint gains
* Strong forint would hurt exports, engine of recovery
By Marton Dunai and Sandor Peto
BUDAPEST, April 21 (Reuters) - Hungary's forint is expected to rise further after Sunday's election, which could prompt the incoming pro-growth Fidesz government and the central bank to try to stem currency gains to help the economy.
An expected two-thirds majority for Fidesz, enough to launch deep reforms in the recession-hit economy, has beefed up market optimism, and the forint has outperformed its regional peers since the first round of voting on April 11, which Fidesz won by a landslide.
Since then the forint has firmed 1 percent to 263.70 versus the euro by 0630 GMT on Wednesday. The zloty of Poland, the only European economy to avoid recession, was flat while the Czech crown shed 0.3 percent in the same period.
Analysts say problems in the euro zone will not erode gains as investors have begun to differentiate between emerging Europe and Greece and the forint could rise further to levels which could hurt exports, the engine of recovery.
"At the current level it's not obvious a strong forint is in anyone's interest," Morgan Stanley analyst Pasquale Diana said.
"First, you don't need it from an inflationary standpoint," he said. "Second ... this economy is frankly humming on one cylinder (exports). This is not a time you need EUR/HUF heading south, especially if it is not warranted by fundamentals."
The forint's recent gains are inconsistent with levels seen in the previous 9 months, when it hardly deviated from the 270 per euro level. The currency is also stronger than seen in the most recent Reuters forecasts.
Before Fidesz's big victory in the first election round, most analysts predicted the forint would stay around 270 per euro in the next six months at least.
Now most of them see it rising further in the short term.
"In my view the forint will ... firm to between 250 and 260 in the short term," Concorde Securities analyst Janos Samu said. "Regional currencies will again see appreciation pressure."
Hungary's external financing capability, after deep budget cuts last year, is among the best in the region, also seen as a positive for the forint.
Hungarian bonds are also seen extending their strong rally that pushed yields to all-time lows.
Credit default swap spreads have hit their lowest since before Hungary resorted to an IMF and EU bailout in 2008.
CENTRAL BANK TAKES NOTE
Hungary's central bank has also noted the forint's strength. Vice Governor Ferenc Karvalits told Reuters last week there was no need for tighter monetary conditions.
Karvalits said the Hungarian bank "generally refrains" from using intervention but "does not categorically exclude" the use of this tool if needed.
He also said further cautious rate cuts from the current record low of 5.5 percent were on the cards.
Emboldened, markets may price deeper rate cuts than the bank is willing to deliver -- even after rate setters shifted toward a more dovish stance in March.
"We think that there is scope for front-end rates to overshoot on the downside, especially if the forint remains strong," Morgan Stanley's Diana wrote in a recent note.
The NBH is fairly tolerant towards a strong forint, analysts said, but persistent pressure on the currency could force rate cuts and possibly even direct intervention around 255 forints to the euro.
"The NBH can't fine-tune the exchange rate through interest rate cuts, so I'm inclined to think there will be intervention as well," MKB Bank analyst Zsolt Kondrat said.
Poland and Romania have already intervened to cool markets.
"(Hungary) is the exception, not the rule, as we have not deployed intervention yet," Kondrat added.
Fidesz, whose top priority is economic growth, is likely to favour lower rates as well. That would boost corporate lending and weaken the forint to benefit exports, the sole driver of economic growth amid sluggish domestic consumption.
"For the economy, (EUR/HUF) 270 would be good," Samu said. "I think Fidesz will want an even weaker exchange rate."
An exceedingly strong forint may prompt the new Fidesz government to try to talk down the currency, said Balint Hada, an analyst at Quaestor Financial Consulting in Budapest.
But a positive scenario for Hungarian markets, including the forint, hinges on a healthy global background.
Analysts said risks could re-emerge in the second half of 2010. Liquidity in global markets may tighten and the new government may loosen the fiscal grip to restart growth.
"The current (global) optimism is fragile," Hada said. "My fear is that something might come, perhaps as early as this quarter, a bad economic figure which would shatter optimism. It would be much harder to navigate the (Hungarian) economy then."
A significant forint weakening towards 300 versus the euro would unnerve the central bank and put an end to monetary easing as it could threaten financial stability. According to a recent central bank study, it could also hurt the economy by forcing banks to tighten credit. (Editing by Stephen Nisbet)