The Swedish krona continued its downward trend on Wednesday. The EUR/SEK exchange rate surged to 11.78 and is hovering near its highest level since November last year. It has soared by over 6.6% from its lowest point this year.
Similarly, the USD/SEK surged to 10.92, higher than this year’s low of 9.90, making krona one of the worst-performing developed country currencies in the market.
EUR/SEK vs USD/SEK
The currency continued its downward trend after the latest Riksbank interest rate decision. In it, the bank decided to slash interest rates by 25 basis points to 3.75%. It also hinted that it will deliver two more cuts this year.
Riksbank hopes that these rate cuts will help to supercharge the ailing economy now that inflation is falling. The most recent data shows that the headline Consumer Price Index (CPI) has plunged to 4.1%, down from its 2023 high of over 12%. The statement said:
“If the inflation outlook still holds, the policy rate is expected to be cut two more times during the second half of the year, in line with the forecast in March.”
The bank believes that the tumbling krona, geopolitical tensions, and the weak krona will trigger Sweden’s inflation.
Riksbank’s decision will have carry trade implications for the Swedish krona, which explains why it is tumbling. Carry trade is a situation where investors borrow from low-interest countries to invest in higher-yielding currencies.
As a result, the spread between Swedish interest rates and those in Europe and the United States is set to widen. In Europe, the European Central Bank (ECB) left interest rates unchanged at 4.35% while in the US, they stand at between 5.25% and 5.50%.
The gap between these rates will likely start to narrow later this year. The ECB is expected to start cutting rates in June while analysts expect the Fed will deliver two cuts later this year.
US inflation has remained stubbornly high this year, with the headline Consumer Price Index (CPI) standing at 3.5%. The Personal Consumption Expenditure (PCE) rose to 2.5% in March, which is higher than the bank’s target of 2.0%.
Still, the Fed is battling a state of stagflation where high inflation has been accompanied by slow economic growth. As such, it could slash interest rates later this year to supercharge the economy.
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