Nordic Currencies: Norway's Krone Rises as Inflation Quickens

By Emma O'Brien

Aug. 11 (Bloomberg) -- Norway's krone rose against the dollar for the first time in five days and advanced versus the euro as the fastest pace of inflation in 7 1/2 years raised speculation policy makers will increase interest rates.

Norway's central bank boosted the target lending rate to 5.75 percent in June and said inflation may force it to raise the benchmark again. The highest interest rates since 2003 attract carry trade investors, who get funds in countries with low borrowing costs and invest where returns are higher.

``Inflation has been the main driver of the Nokkie,'' said Jostein Tvedt, a currency and debt strategist in Oslo at SEB AB, Scandinavia's third-biggest bank by assets. ``The probability of a hike in October has obviously increased. The central bank has to be more hawkish.''

The krone rose as much as 0.9 percent to 5.3135 per dollar, before trading at 5.3323 at 2:03 p.m. in Oslo, compared with 5.3591 on Aug. 8. It increased 0.5 percent to 8.0042 per euro, from 8.0425 on Aug. 8, when it dropped 0.6 percent against the 15-nation currency.

The underlying inflation rate, which excludes energy costs and taxes, climbed to 2.9 percent in July, Oslo-based Statistics Norway said on its Web site today. It was the highest level since February 2001. The median forecast of 19 economists surveyed by Bloomberg News was for a 2.6 percent pace. Prices rose 0.2 percent in the month.

Norway's target lending rate compares with 4.25 percent in the euro zone, 2.75 percent in Switzerland and 2 percent in the U.S. Japan's 0.5 percent target rate is the lowest among developed countries.

Rate Decision

Norges Bank is next scheduled to announce a decision on its benchmark interest rate on Aug. 13.

In other trading, the Swedish krona gained against the euro and the dollar. The currency increased 0.1 percent to 9.3900 per euro, from 9.4024, and rose 0.2 percent to 6.2516 per dollar, from 6.2648.

Iceland's krona, the worst-performing emerging-market currency against the dollar and the euro over the past 12 months, strengthened for a second day against the euro and rose for the first time in four days versus the dollar. It increased 0.6 percent to 122.44 per euro, from 123.15 at the end of last week, and advanced 0.7 percent to 81.49 per dollar, from 82.06.

In the Nordic government bond market, the yield on Sweden's 5.25 percent note due in March 2011 gained 2 basis points, or 0.02 percentage point, to 4.31 percent. The yield on Norway's 6 percent note maturing May 2011 fell 7 basis points to 4.85 percent. Bond yields move inversely to prices.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net