Traders Selling Krone Submit to Norway's Efforts to Fight Slump

  • Norges Bank says may ease policy further to counter oil drop
  • Olsen says weaker currency is starting to help economy

Currency traders are giving Norges Bank Governor Oeystein Olsen exactly what he wants.

Norway’s krone tumbled to a 13-year low versus the dollar Thursday after the central bank surprised markets by cutting interest rates to a record and saying it might ease further to support an economy battered by the collapse in oil prices. The currency of Europe’s biggest crude producer fell against all 31 of its most-traded peers and slipped below parity with Sweden’s krona for only the second time this year.

“I thought it was equally likely that they would remain on hold and send a very dovish message, because the krone is already weak,” said Carl Hammer, chief foreign-exchange strategist at SEB AB in Stockholm. “The rate path was reduced substantially. It’s a very dovish message.”

Norges Bank’s decision to cut its deposit rate by a quarter percentage point to 0.75 percent highlighted the challenges faced by central banks battling the impact of a slowing global economy and turmoil in China. A weaker exchange rate will help it boost growth.

Fed Decision

Norway’s rate cut came a week after the Federal Reserve refrained from implementing the first U.S. increase in nine years. The Oslo-based central bank forecast its main rate may fall to as low as 0.59 percent in the third quarter of next year. Lower borrowing costs tend to undermine a currency by making financial assets cheaper.

The krone slid 2.3 percent to 8.4626 per dollar as of 5:13 p.m. London time after touching 8.4861, the weakest level since 2002.

It plunged as much as 3.1 percent to a one-month low of 9.5380 per euro and reached 0.99 Swedish krona.

Norges Bank eased policy even as its new forecasts suggest underlying inflation will remain above target until early 2017. Olsen said Thursday that price growth will likely abate as the effects of the weaker krone make themselves felt, while emphasizing the flexibility of the bank’s inflation-targeting policy.

“We’re seeing positive signs of a weaker krone stimulating other parts of our economy,” Olsen said in an interview with Bloomberg. “So yes, we have some worries, but I don’t think we should be too pessimistic.”

‘Lower, Longer’

Norway’s central bank said it sees mainland gross domestic product growing 1.25 percent this year and next, and 2 percent in 2017, while petroleum investments will plunge 12.5 percent in 2015 and 10 percent next year. The bank predicts surveyed unemployment will rise to 4.5 percent next year.

“The overall impression is of a central bank that intends to pursue a lower-for-longer policy right through the next three years,” Paul Meggyesi, a foreign-exchange strategist at JPMorgan Chase & Co. in London, wrote in a client note.

The euro-krone exchange rate “is now even more stretched and should start to slow momentum above 9.50,” he wrote.

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