UPDATE 1-Ukraine's hryvnia surges 8 pct vs dollar after hefty rate hike

Tue Apr 15, 2014 7:29am EDT

* Central bank raises rates by 300 bps late on Monday

* Currency soars but still vulnerable to political turmoil

* Had lost nearly two-fifths of its value this year (dealers and analyst comments added)

KIEV, April 15 (Reuters) - Ukraine's hryvnia surged 8 percent against the dollar on Tuesday after the central bank raised interest rates by 300 basis points to defend the currency, battered by political turmoil, Reuters data showed .

The bank lifted its benchmark rate for the first time in eight months late on Monday, to 9.5 percent from 6.5 percent, to prop up the hryvnia, which had lost almost two-fifths of its value since the start of the year due to Ukraine's conflict with Russia.

The bank also increased the overnight loan rate to 14.5 percent from 7.5 percent.

The hryvnia was up 8.1 percent at 12.59 to the dollar at 1110 GMT but analysts said it remained vulnerable to political developments.

"We are seeing a bit of a short-term bounce in the hryvnia on account of the rate rise," said Neil Shearing, head of emerging markets research at Capital Economics in London.

The central bank said that its decision was necessary to rein in inflation and calm money markets.

"The further trend is unpredictable. The rates are not key factors which can help the hryvnia to stabilise," a Ukrainian bank dealer said.

Political turmoil was having a bigger impact on the market than central bank measures, he said.

The hryvnia has plunged in value due to the conflict with Russia, and in particular its annexation of Crimea last month, which has led to the most strained relations between Moscow and the West since the Cold War.

"The market is very emotional and sensitive these days. Exporters are not hurrying to sell their dollars. Clients say: who can guarantee that we will not see foreign tanks in Kiev soon,” another dealer said.

After the loss of Crimea, Kiev is struggling with an uprising by pro-Russian separatists who have seized administrative buildings, including arsenals filled with weapons across the Donetsk region of eastern Ukraine.

Kiev said an "anti-terrorist operation" against pro-Moscow separatists was underway on Tuesday, though the crackdown got off to a slow start, if at all.

Kiev says the separatists are organized by Moscow, seeking to repeat the seizure of the Crimea region.

The central bank's ability to support the hryvnia by intervening to sell dollars is limited by tiny foreign currency reserves, which shrank to about $15 billion at the end of March. Ukraine has to repay about $10 billion in external debts this year and needs several billion more to buy gas from Russia. (Reporting by Natalia Zinets; Editing by Louise Ireland and Susan Fenton)

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