Serb cbank props up dinar as ICJ rules for Kosovo

BELGRADE (Reuters) - Serbia's central bank intervened on Thursday as the dinar currency hit all-time lows, weakened by a World Court ruling that Kosovo's 2008 secession did not violate international law.

The dinar first fell to 105.21 per euro, but briefly firmed to 104.80 after the central bank started selling 10 million euros, saying it sought to smooth trading in low turnover.

The currency fell back to a further record weak point at 105.37 shortly after 1300 GMT.

"The market absorbed the intervention rapidly but it is still unclear whether its reaction was also the product of the ICJ ruling. We might see more of it on Friday," a dealer said.

The central bank held its two-week benchmark rate unchanged at 8 percent earlier on Thursday, as expected by the market and following 1.5 percentage points of cuts between March and May.

The dinar had weakened on Wednesday, prompting the bank to sell 20 million euros to prop it up, and the currency stayed under pressure as markets awaited the outcome of the World Court ruling on the former Serbian province.

The non binding decision of the International Court of Justice is likely to have knock-on effects on Serbia's political stability and EU membership bid.

"We will see temporary disturbances on the money market as some cautious dealers will flee from the dinar to the euro, but it will all calm down soon," said Vladimir Vuckovic, a lecturer with the Belgrade-based Megatrend University.

"The state leadership will not jeopardize the country's position now," he said.

Dealers fear the ICJ ruling in Kosovo's favor may provoke more instability in the already volatile region.

"In the past we had major movements of between two and 2.5 dinars to the euro during such important events," said one trader in Belgrade.

The central bank has sold 1.52 billion euros since the start of 2010, and 2.6 billion euros overall since the second half of 2008 to defend the dinar.

Its currency reserves fell by 238.1 million euros ($309 million) to 10.49 billion euros in June, mainly due to 421 million euros of interventions.

(Reporting by Aleksandar Vasovic; Editing by Ruth Pitchford)