Borg Joins Wheeler in Escalating Response to Currency Gains

Sweden’s government abandoned its hands-off stance on the krona and New Zealand announced it sold the kiwi, joining a growing band of countries to escalate their response to strengthening currencies.

The New Zealand dollar fell to a five-week low after Reserve Bank Governor Graeme Wheeler said the central bank sold the kiwi and can do so again to protect growth. In Sweden, Finance Minister Anders Borg said the krona’s appreciation warrants central-bank consideration. The won’s advance prompted Kim Seong Wook, a director in South Korea’s finance ministry, to say the government will closely monitor any “unnecessary movement” that increases exchange-rate volatility.

“The krona could become an issue, particularly from the central bank perspective; there are some good arguments for them to consider how to look at the krona,” Borg said yesterday in an interview in Abuja, Nigeria. “It should be based on fundamentals and obviously priced on the market, but there are also some risks you’ll see too much of an appreciation. That’s obviously one of the worries we have.”

Sweden, which exports half its economic output, is reversing course after earlier this year vowing not to interfere with the exchange rate. Borg joins policy makers from Japan to Switzerland to Israel, all struggling to contain appreciations that have hurt their exports. In Turkey, the central bank’s gauge for measuring lira strength signals a rate cut is needed to adjust the exchange rate.

More Countries

“More and more countries will end up adopting monetary policies where their currencies become part of their monetary policy,” Paul Lambert, head of currency and fixed income at Insight Investment Management Ltd., said today at a Euromoney conference in London. “In that world, it will become increasingly difficult to hang together the kind of collegiate economic environment that we’ve grown used to.”

The krona has gained 4.4 percent against the euro in the past year and traded little changed at 8.5428 per euro at 3:09 p.m. London time today. The so-called kiwi dollar slid 0.8 percent to 83.88 U.S. cents and fell to as low as 83.60 U.S. cents, the weakest level since April 1.

In Japan, the yen sank 20 percent against the dollar in the past six months, the most among major currencies, betting that expanded easing by Prime Minister Shinzo Abe’s pick to run the central bank would debase the currency.

At his first policy meeting on April 4, Bank of Japan Governor Haruhiko Kuroda pledged to double monthly bond purchases to about 7 trillion yen ($70.9 billion) in an effort to stoke inflation and revive the economy.

Switzerland already caps the level of its franc against the euro at 1.20.

‘Aggressive Comments’

The Australian dollar matched its weakest level in two months today after the Reserve Bank lowered its benchmark interest rate yesterday. Governor Glenn Stevens reduced the overnight cash-rate target by 25 basis points to 2.75 percent, saying in a statement that the Aussie’s record strength “is unusual given the decline in export prices and interest rates.”

“Central banks who haven’t had a need to cut rates are seeing that their currencies have appreciated and they are having to lean against this strengthening pressure,” Michael Sneyd, a currency strategist at BNP Paribas SA in London, said today by phone.

“New Zealand is where we’ve had the most aggressive comments and action. It is causing some long kiwi positions to be taken out,” he said. A long position is a bet the price of an asset will rise.

The Reserve Bank of New Zealand publishes monthly figures for its net currency sales that may or may not involve direct intervention, which show it sold NZ$2 million in March, and NZ$199 million in December. It had an intervention capacity of NZ$8.7 billion at March 31, the data show.

Developed Markets

The Swedish krona’s 6.8 percent appreciation over the past 12 months is the best performance in a basket of 10 developed-market currencies tracked by Bloomberg in the period, after the New Zealand dollar’s 7.6 percent gain.

Wheeler’s announcement today marked the first time that New Zealand’s central bank confirmed a currency intervention since June 2007, when it sold New Zealand dollars.

The krona has soared about 28 percent against the euro since the end of 2008, sparking calls from Swedish exporters to stem its ascent. Riksbank Governor Stefan Ingves acknowledged last month the strong krona has undermined the bank’s efforts to achieve its inflation target.

In neighboring Norway, the krone jumped at least 0.8 percent against all of its 16 major peers today after the central bank kept its benchmark deposit rate at 1.5 percent today, matching the median estimate in a Bloomberg survey of economists, even as credit growth and property prices continued to rise from records. Governor Oeystein Olsen has warned he’s ready to cut rates should krone strength persist.

Forecasts Cut

Poland’s zloty was little changed versus the euro after the central bank cut its benchmark interest rate to a record low. The won strengthened 0.5 percent to 1,086.55 per dollar.

Borg last month cut his forecasts for Sweden, citing the krona’s impact on exports and unemployment. The Riksbank on April 17 said it needs to delay monetary tightening plans until the second half of 2014 as it forecast price growth won’t reach its 2 percent target until 2015. Borg estimates Swedish unemployment will reach 8.4 percent in 2014, the highest rate in Scandinavia.

“There is a rebalancing of the Swedish economy,” Borg said. “We had a very weak currency for quite some time, but obviously we don’t want to see an excessive appreciation of the currency, so this is an issue that we’ll have to follow very carefully. I mean, we still want to keep our industry quite competitive.”

Sweden’s National Institute of Economic Research in March predicted the krona will reach 8.44 against the euro this year and at 8.41 in 2014. HSBC Holdings Plc last month estimated it will reach 8.10 per euro by the end of the year.

“I think we have a very high degree of market credibility with an AAA rating,” Borg said. “If anything, we’re actually seeing a little bit too much confidence in the krona.”