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Norway Won’t Buy Foreign Currency for Wealth Fund Next Month

Norway’s central bank said it won’t buy any foreign currency for its $650 billion sovereign wealth fund next month amid changes in the nation’s strategy to hedge against overheating.

The decision sent the krone higher, and Norway’s currency rose as much as 0.7 percent against the euro to trade at 7.3961 as of 12:26 p.m. in Oslo. Versus the dollar, the krone soared as much as 1 percent to trade at 5.6818. The gains made the krone today’s best-performing major currency against the euro, the dollar and the yen.

“One of the biggest headwinds against near-term krone strength has been averted,” Erica Blomgren, chief strategist at SEB AB in Oslo, said in reply to e-mailed questions.

The decision not to purchase foreign currency next month, which Blomgren said “surprised” market participants, follows the central bank’s efforts to build up a separate hedge against overheating through its so-called petro-buffer. Norway’s central bank converts oil revenue received into foreign currency, which its wealth fund invests abroad to avoid overheating the domestic economy.

“Norges Bank has increased the size of the petro-buffer portfolio considerably through 2012 for covering the transfers towards the end of the year,” the bank said. “These changes have reduced Norges Bank’s need to purchase foreign exchange in the market.”

The move also follows a decision by the Finance Ministry to allow allocation of cash to the wealth fund in December, the Oslo-based bank said. That means the central bank can also purchase currency in December, a transaction that wasn’t possible previously, DNB ASA said.

“As a result, approximately half of the initial transfer in November will be made in December this year,” the central bank said.

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