Nordic Currencies: Swedish Krona Declines as Riksbank Cuts Rate

By Bo Nielsen

Dec. 4 (Bloomberg) -- Sweden’s krona traded near a record low against the euro after the Riksbank lowered its benchmark interest rate by the most in 16 years to revive the ailing economy.

The krona snapped a two-day gain as policy makers, who raised borrowing costs as recently as September, lowered the repo rate by 1.75 percentage points to 2 percent, exceeding the median estimate of a 1 percentage-point cut by 18 economists in a Bloomberg News survey. It fell 6.7 percent against the euro and 9.2 percent versus the dollar in the past month as the Swedish economy shrank and the rate of inflation dropped the most in three years.

“It was a huge cut,” said Carl Hammer, a currency strategist in Stockholm at SEB AB. “This will add to the negative outlook for the krona,” which will slip to 10.69 per euro this week, Hammer predicted.

Sweden’s currency fell as much as 2 percent to 10.6229 per euro, and was at 10.5464 by 4:25 p.m. in Stockholm, from 10.4160 yesterday. It dropped to a record 10.6823 on Nov. 21. Against the dollar it declined as much as 2.5 to 8.3987 and was recently at 8.3115.

“There has been an unexpectedly rapid and clear deterioration in economic activity since October,” the Riksbank said in the statement after the rate decision. “A much lower repo rate and repo-rate path are needed.”

Scandinavia’s biggest economy slid into a recession in the third quarter as the global financial crisis curbed demand for the nation’s exports and consumers reined in spending. Seasonally adjusted gross domestic product contracted 0.1 percent from the previous three months, when it also shrank a revised 0.1 percent, Statistics Sweden said last week.

Trade Flows

Sweden’s trade with the euro region is 10 percent higher as a share of the economy than other Scandinavian nations, increasing its vulnerability to a slowdown in the region, according to John Hydeskov, a senior analyst in Copenhagen at Danske Bank A/S, Denmark’s biggest bank.

The krona’s decline may be limited as the European Central Bank cut its main refinancing rate by 0.75 percentage point to 2.50 percent today. The median estimate in a Bloomberg survey was for a half point cut.

In other trading, Norway’s krone weakened 0.4 percent to 9.0724 versus the euro and 0.7 percent to 7.1556 per dollar as the price of oil, the country’s biggest export, fell below $46 a barrel for the first since May 2005.

The Oslo-based Norges Bank, which next meets Dec. 17, will cut the key rate to 3 percent by the end of 2009, from 4.75 percent now, Mansoor Mohi-uddin, a UBS AG analyst in Zurich, wrote in a client note this week.

‘Good Prediction’

“Since we have succeeded in anchoring inflation expectations, that gives us room for maneuver,” Norwegian central bank Governor Svein Gjedrem said this week. “The expectation that we will cut rates is a good prediction.”

Iceland’s krona, which traded at 187 per euro in Iceland yesterday, may weaken after the island nation’s central bank moved the currency closer to a free float. It ended the daily foreign-exchange auctions and named three market makers to determine the price of the krona, the bank said.

“The exchange rate of the krona must be determined by supply and demand in the marketplace and not the sale of foreign exchange from the central bank’s reserves,” the Reykjavik-based Sedlabanki said yesterday on its Web site.

Weaken

The krona, which was quoted at about 300 per euro earlier this week among overseas banks, probably won’t fall to that level under the new rules because of a lack of participation from foreign investors, said Petter Sandgren, head of emerging markets at SEB AB in Stockholm.

The krona may weaken to the “low 200s” as the central bank gradually eases it back into the currency market this week, Sandgren said. The bank “doesn’t want to use its reserves to bail out the krona, it will take it slowly,” he added.

Moody’s Investors Service downgraded the foreign and local currency ratings of Iceland to Baa1 with a negative outlook from A1, the agency said in a statement today.

Nordic government bonds rose, with the yield on Norway’s 6 percent government security maturing May 2011 declining 15 basis points to 3.14 percent. The yield on Sweden’s 5.25 percent note due March 2011 slipped 10 basis points to 1.83 percent. Yields move inversely to bond prices.

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