Nordic Currencies: Norway's Krone Rallies on Bank-Rescue Plan

By Bo Nielsen

Oct. 13 (Bloomberg) -- The Swedish and Norwegian currencies rose against the euro and dollar after European leaders agreed to guarantee bank borrowing, prompting investors to return to buying higher-yielding assets in smaller countries.

Gains were led by Norway's krone as leaders of the 15-nation economy endorsed bailing out ``systemically'' critical banks in distress, fueling a rally in stock markets and pushing oil higher. Norwegian bonds slumped after the government said yesterday it would swap as much as $55.4 billion in notes for commercial banks' mortgage debt to boost market liquidity.

``Having stared into the abyss on Friday, the risk environment is marginally more positive this morning,'' David Simmonds, London-based head of currency research at Royal Bank of Scotland Group Plc, wrote in a client note today.

Norway's krone rose as much as 1 percent to 8.3855 per euro, and was at 8.4260 by 1 p.m. in Oslo. It added 2.8 percent to 6.1627 per dollar, the biggest gain since Sept. 22.

The Swedish krona climbed for a second day against the euro, gaining 0.3 percent to 9.6394. It advanced 1.6 percent to 7.0929 per dollar.


European leaders agreed to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat to try to stave off a recession. The OMX Stockholm 30 index of equities surged 7 percent today while the OBX Stock Index in Oslo added 6.6 percent, after slumping 20 percent last week as investors sold higher-yielding assets.

When risk aversion is high investors tend to shun assets in the less liquid Norwegian and Swedish currencies on concern they won't able to sell them quickly if needed. The euro gained 0.9 percent against the Swedish krona and 3.1 percent versus the Norwegian krone in the last month as stock markets plummeted.

Rates Outlook

Gains in the Norwegian krone may be limited on speculation the central bank will lower borrowing costs this week, according to a note today by Commerzbank AG analysts led by Ulrich Leuchtmann in Frankfurt.

Norske Bank pushed forward its regular interest-rate meeting from Oct. 29 to Oct. 15. The bank kept borrowing costs on hold last week while Sweden's Riksbank cut its main rate a half point to 4.25 percent as part of a coordinated effort by central banks, including the European Central Bank, to revive interbank lending.

The two currencies may come under pressure as Sweden's Riksbank will reduce rates a further 1.25 percentage points by the end of June while Norwegian policy makers will cut rates to 4.25 percent by the end of next year, starting with a 0.5 percentage point reduction from 5.75 percent this week, according to a note by UBS AG analyst Ashley Davies in Singapore.

The price of crude oil, Norway's biggest source of exports, climbed $5 to $81.65 a barrel after dropping below $80 last week for the first time in a year.

`No Active Market'

Trading in Iceland's krona all but dried up by the end of last week as the country's banks collapsed, sending the currency's bid/ask spreads between foreign banks to 300/450 per euro on Oct. 10. ``There is no active market'' in the currency ``and it is unlikely there are any volumes going through,'' Antje Praefcke, a currency strategist in Frankfurt at Commerzbank said in an e-mailed note today.

JPMorgan Chase & Co. was reported to be in negotiations with Sedlabanki in Reykjavik to underwrite all krona trades in an attempt to unlock the currency markets, according TD Securities Ltd. in London.

The yield on Norway's 6 percent security maturing in May 2011 rose 40 basis points to 4.52 percent, according to Danske Bank A/S prices. The yield on Sweden's 5.25 percent note due March 2011 climbed 6 basis points to 3.35 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net