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Krone Drops Most in Six Months on Norges Bank Rates Cut

March 14 (Bloomberg) -- The krone dropped the most in six months against the euro after Norway’s central bank unexpectedly cut its benchmark interest rate as it attempts to deter investors from buying the currency as a haven.

The Norwegian currency declined to a five-week low versus the dollar. Norges Bank policy makers cut the key borrowing cost by a quarter of a percentage point to 1.5 percent, seeking to cool an expanding property market without spurring krone strength. The decision was forecast by just two of 16 economists surveyed by Bloomberg. The remaining 14 predicted no change.

Norway has “become extremely sensitive to strength in the currency to the point where it overrides domestic concerns on the rate-setting policy,” said Adam Cole, global head of foreign-exchange strategy at Royal Bank of Canada’s RBC Capital Markets unit in London. “Having done it once, one would assume Norges Bank would do it again if the krone continues to strengthen, regardless of what domestic policy dictates.”

The krone fell 1.7 percent to 7.5816 per euro at 4:11 p.m. London time, after sliding as much as 1.8 percent, the biggest drop since Sept. 12. The currency depreciated 2.2 percent to 5.8262 per dollar, reaching the weakest since Feb. 6.

“On a one- to three-month view there’s probably further downside for the currency from here,” said Cole.

Policy Dilemma

The krone strengthened 1.8 percent this year, according to Bloomberg Correlation-Weighted indexes, the third-best performer behind New Zealand’s and Canada’s currencies.

“The continuing downturn abroad and the strong krone are contributing to keeping inflation low and are weighing on growth in Norway,” Governor Oeystein Olsen said in a statement. “The current outlook suggests that the key policy rate may remain low longer than projected earlier.”

Norwegian policy makers are grappling with a dilemma over how to cool a commodities-driven recovery without spurring krone gains. The currency reached a nine-year high against the euro this month as investors sought the higher returns offered by AAA rated Norway relative to the euro area.

The central bank will keep the benchmark rate unchanged at 1.5 percent for the rest of 2012, and the currency is likely to gain further against the euro, according to Barclays Capital.

“We continue to see room for further performance here,” London-based analysts Marcus Widen and Mikael Nilsson wrote in an e-mailed research note. “We also remain constructive on the krone over the medium term and will look for opportunities to sell the euro against the Norwegian krone in the coming days.”

The Swedish krona weakened 1.2 percent against the dollar to 6.8544.

Sweden’s main interest rate will be at 1.4 percent in the next year, from 1.5 percent now, according to a survey of labor market organizations, purchasing managers and money market participants commissioned by the central bank. The economy will grow 1.6 percent in the next 12 months and 2.3 percent the following year, according to the survey published today.

Norwegian 10-year bonds fell for a second day, with yields rising seven basis points to 2.46 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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