Game of Thrones Crowns Iceland Krona as World's Best Currencyby
Currency gains also fueled by growth, relatively high yields
Islandsbanki sees krona gaining a further 2.5% versus euro
Iceland’s interest-rate cuts should have slowed gains in its currency. Instead, the krona is now a world-beater.
The currency has surged 4 percent against the euro and 6.4 percent against the dollar since March 31, taking its gains in the past year to 21 percent and 15 percent, respectively. That’s the biggest advance among global currencies for both periods. Islandsbanki hf sees it rallying a further 2.5 percent to 113 per euro by the final quarter of this year.
The krona’s gains have accelerated as record tourist arrivals, economic growth that exceeded 11 percent in the final quarter of 2016 and western Europe’s highest yields fuel fund inflows. Iceland’s two rate cuts in the second half of last year haven’t eroded the currency’s appeal, while a government move in March to lift most of the capital controls put in place after the 2008 banking collapse only caused a temporary pullback.
“While volatility did increase when controls were lifted, the trend has been toward further appreciation and we expect some further appreciation throughout the summer,” Jon Bjarki Bentsson, a Reykjavik-based economist at Islandsbanki, said in a phone interview. “The surge in tourism has outpaced the growing deficit on goods trade.”
The krona traded at 115.85 per euro and 106.18 per dollar Wednesday.
Tourists are pouring into Iceland to catch a glimpse of the northern lights, to detox or simply explore the locations of popular TV series Game of Thrones. Jokulsarlon, which starred in an improbable James Bond car chase across a frozen lake flanked by spectacular blue icebergs, is now one of the country’s top tourist spots, attracting about half a million visitors each year.
Iceland received a record 1.8 million foreign visitors last year, a 40 percent annual jump that followed a 30 percent increase in 2015, official data show. Overwhelmed by the tourism boom, Iceland’s government is even considering ways of raising taxes in the tourism sector. Gross domestic product rose 11.3 percent in the fourth quarter from a year earlier, after growing 9.6 percent in the previous three months.
Still, Sedlabanki, the nation’s central bank, reduced borrowing costs last year amid concern the krona’s appreciation will imperil its inflation target and hurt exporters. Its benchmark rate is now at 5 percent, compared with the European Central Bank’s deposit rate of minus 0.4 percent.
The nation’s reserve assets climbed 12 percent to 824 billion kronur in March from a year earlier, the latest data show, suggesting the central bank bought foreign exchange in a possible attempt to slow the krona’s appreciation. Measures introduced last year that prevent offshore investors from pulling out all their money too soon, meant to reduce volatility in capital flows, haven’t deterred the investment inflows.
“Overall, the fundamentals look supportive of the exchange rate and the central bank has reserves that exceed all adequacy measures,” Hafsteinn Hauksson, an economist at Gamma Capital Management hf, said by phone. “Judging by the central bank‘s continued foreign-exchange purchases during April, market pressures seem geared toward appreciation.”