Oct. 18 (Bloomberg) -- Sweden’s krona strengthened against both the euro and the dollar after Riksbank Governor Stefan Ingves warned of risks associated with keeping interest rates low that “can’t be ignored.”
The krona strengthened as much as 0.9 percent against the euro and traded at 8.5708 as of 12:26 p.m. in Stockholm, making it today’s best-performing major currency against the euro, the dollar and the yen. Versus the dollar, the krona gained 0.8 percent to 6.5353. The krona has risen 2.5 percent this year, making it the third-best performer among 10 developed-nation currencies, Bloomberg Correlation-Weighted Currency Indexes show. Versus the euro, the krona has appreciated 4.2 percent since the end of December.
Ingves responded to comments from economists at some of Sweden’s biggest banks and trade unions arguing that a recent spate of job cuts point to a higher unemployment level than the government is predicting. That had prompted calls from industry groups for rate cuts as Sweden shows signs of succumbing to faltering demand across much of the rest of Europe.
“Voices have been raised for lowering an already very low rate further to stimulate employment,” Ingves wrote in an opinion piece published today in Svenska Dagbladet. “Today’s unemployment is a problem but as Riksbank governor I can’t just act in a short-term perspective. I also have to take into account the long-term consequences of today’s monetary policy.”
Overnight index swaps in Sweden showed no probability of a cut next week, compared with 22 percent before Ingves’s comments. The swaps now show a 5.8 percent probability of a rate increase this month.
Ingves’s comments “effectively mean that we won’t get a rate cut next week,” Steven Barrow, head of G-10 research at Standard Bank Plc in London, said by phone today. “That’s probably fairly clear now.” The krona “could see a bit of extra firmness going forward as well,” he said.
Ingves talked down speculation the Riksbank will need to cut rates at next week’s meeting amid signs Sweden’s labor market is deteriorating. His six-member board meets on Oct. 24 and announces its decision the following day.
“This is quite a cooling of these expectations,” Anders Ekloef, a currency strategist at Swedbank AB, said by phone. “The chance of a series of cuts is quite low. It has come down with today’s comments and this is supportive in the medium-term for the krona.”
Unemployment rose to 7.4 percent in September from 7.2 percent the previous month, the Stockholm-based statistics office said today, in line with estimates in a Bloomberg survey. The seasonally adjusted rate held at 7.8 percent.
“We have spoken very clearly for a long time now about downside risks and it now looks like some of the downside risks are materializing,” Prime Minister Fredrik Reinfeldt said yesterday.
Sweden’s $500 billion economy is vulnerable to an economic slowdown abroad since it exports about half of its output. About 70 percent of its sales abroad go to Europe where countries are cutting spending to reduce debt.
TeliaSonera AB yesterday became the latest Swedish company to announce job cuts. Truckmaker Volvo AB, papermaker Holmen AB, steel manufacturer SSAB have also in recent weeks said they’ll trim their workforce amid sluggish markets.
The Swedish central bank last month cut its repo rate by quarter of a percentage point for a third time since December 1.25 percent, citing the strong currency and saying “weak demand from the euro area will now damp exports.”
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