Sweden Braces for Krona Swings as U.S. Tightening to Add Turmoil

After central bankers in Switzerland and Denmark whipsawed currency markets in the past week, Sweden’s finance minister says the volatility may just be starting as the U.S. Federal Reserve moves toward tightening.

“It’s possible that we will see more turbulence in the currency market in the coming period when we, for example, may see that the U.S. central bank possibly will raise rates which can lead to large currency flows,” Finance Minister Magdalena Andersson said Tuesday in Stockholm. “The Swedish krona could of course be affected” even though it’s impossible to say in what way, she said.

U.S. Fed officials have signaled they may start raising rates later in 2015 as the U.S. economy recovers. Investors are also bracing for the European Central Bank to decide later this week if it will buy government bonds for the first time.

Sweden is trying to navigate the turmoil as the krona has slumped over the past year. The government today lowered its growth forecast for the largest Nordic economy to 2.4 percent this year and 2.7 percent in 2016, down from the 3 percent and 3.2 percent, respectively, predicted in October.

The International Monetary Fund today made the steepest cut to its global growth outlook in three years as it predicted slower growth in almost all regions except the U.S.

Sweden’s krona is the worst performer among global currencies over the past 12 months, declining 13 percent against a correlation-weighted basket of currencies. The sell-off has come as the country’s central bank lowered rates to zero last year and has signaled it may resort to quantitative easing early this year to jolt the economy out of deflation.

Own Measures

Neighboring Denmark has this week been trying to thwart currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. Switzerland last week shocked markets by scrapping its three-year-old euro peg, sending the Swiss franc reeling. The Danish central bank on Monday cut its deposit rate by 15 basis points to minus 0.2 percent, matching the record low seen during Europe’s debt crisis in 2012.

“It remains to be seen what ECB’s measures look like,” Andersson said. “Our Riksbank is also planning measures, and it also remains to be seen what those look like. We don’t know that at the moment. Switzerland is an example of that big currency flows can happen quickly.”

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