The Norwegian krone tumbled the most in four years against the dollar and euro after central bank Governor Oeystein Olsen said the key policy rate will be at the “current level, or somewhat lower, in the year ahead.”
Norway’s currency weakened beyond 6 per dollar for the first time since August and slid to the lowest level since October 2008 versus the Swedish krona. Norges Bank kept its benchmark rate at 1.5 percent today and predicted it would be 1.38 percent in the fourth quarter, versus an earlier forecast of 1.45 percent.
“The price action has been quite extreme,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “The language showed a bias towards the prospects of a rate cut. A lot of the market was expecting the Norges Bank to remove this scope, so that was a big surprise.”
The krone slumped 4 percent to 6.0133 per dollar at 4:51 p.m. in London, the biggest decline since Dec. 18, 2008. The Norwegian currency dropped 3.3 percent to 7.9388 per euro after sliding to 7.9694, the weakest since May 2011. It slipped as much as 2.1 percent to 1.0941 Swedish kronor, the least since Oct. 23, 2008.
Analysts had already been revising down their forecasts for the krone. Norway’s currency will end this year at 7.44 versus the euro, according to the median of 40 estimates in a Bloomberg News survey. That compares with a median prediction of 7.25 per euro at the end of 2012.
Olsen has kept the benchmark rate unchanged for more than a year while saying the central bank is ready to act to prevent krone gains from undermining its inflation target and the economy. Norges Bank, which targets 2.5 percent inflation, said underlying inflation will be below 2 percent through 2016.
“The krone had been a favorite long for many months and the position is still unwinding,” said Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, referring to a bet the currency would gain. “Today in particular you had the Norges Bank hint at the potential for rate cuts in the future. I think the krone took that statement pretty hard.”
The dollar surged versus all of its major peers today after the Federal Reserve signaled yesterday it was moving closer to reducing monetary stimulus that has debased the U.S. currency.
The krone has weakened 3.5 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro and the U.S. dollar both strengthened 5.2 percent.