Sweden's krona sheds value amid economic uncertainty
David Landes · 17 Oct 2008, 11:11
Published: 17 Oct 2008 11:11 GMT+02:00
In the last week, the krona has shed nearly 4 percent of its value against the euro, reports the E24 news website.
The previous high mark for the euro-krona exchange rate was back on September 21st, 2001 when one euro cost 9.94 kronor.
The krona’s value against the US dollar has also dropped by more than 10 percent in recent weeks, with the currencies now trading at 7.45 kronor per dollar.
But currency analyst Carl Hammer with SEB bank doesn’t see the krona’s drop in value as anything to worry about.
“This is a new record against the euro. But even if it’s a historically large swing, it’s not a serious currency drop. Currency movements have been large around the world because of this uncertain situation,” he told E24.
Hammar said part of the explanation for the weakening krona was the “rebalancing” taking place in the portfolios of large financial institutions and investment fund administrators in response to turbulence in equity and bond markets.
“Last week rebalancing led to a lot of buying of kronor, this week we’re seeing the opposite,” he said.
The krona is a procyclic currency, which means changes in its value correlate with swings in the economy at large. When times are good, the krona tends to strengthen, but as the economy weakens, the krona’s value follows suit as nervous investors tend to shift assets to major currencies like the euro or US dollar.
But the weakening krona is good news for Sweden’s export-oriented economy, adds Hammer, as the price of Swedish goods now appears cheaper to buyers on the world market.
At the same time, however, Swedes’ purchasing power decreases and there is an increase risk for inflation, which may complicate the Riksbank’s efforts to lower interest rates.
“The rule of thumb is that a 10 percent weaker currency results in a 1 percent rise in inflation as import prices rise,” said Hammer.
“We still don’t think this will hinder the Riksbank from lowering rates next week. But it may unfortunately become significant if the [krona’s] drop continues.”