The Swedish krona is among the main currencies sensitive to the latest developments in Eastern Europe alongside the euro, and both have been the basis of market sentiment surrounding the conflict in markets and economies.

On March 7, as the third round of peace talks ended without any breakthrough and energy prices hit their highest level in 14 years, the SEK fell to its lowest level in nearly two years at almost 10 SEK for 1 USD.

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Dovish Riksbank

The recent dovish stance of the Swedish central bank (Riksbank) is also weighing on the SEK. At its February monetary policy meeting, the Riksbank kept interest rates at 0% and kept the volume of its asset purchases unchanged. The decision dealt a further blow to the SEK, causing its value to fall by 2% shortly after the rate decision.

However, pressure is mounting on Riksbank Governor Stefan Ingves to raise rates as the central bank has acknowledged the rise in the inflation rate due to rising energy prices.

Central bank peer pressure

Still, the central bank does not expect energy prices to rise further this year, it said in its latest policy report, adding that inflation is likely to fall.

The central bank now expects policy tightening in the second half of 2024, earlier than its previous forecast released in November, amid peer pressure as the Bank of England recently hiked rates back to lows. pre-pandemic levels, while the US Federal Reserve has clocked rate hikes at each of its remaining policy meetings this year.

The Riksbank plans to increase its repurchase rate – or the interest it charges commercial banks for short-term borrowing – to 0.06% in the first quarter of 2024 and 0.31% in the first quarter of 2025.

Weakening of the SEK

In its February policy report, the Riksbank acknowledged that the SEK is losing value from its November 2021 levels based on the krone index. The central bank attributed the weakening of the krone to rising turmoil in financial markets.

“Changes in the Swedish krona’s exchange rate usually coincide with changes in risk appetite in financial markets. In the coming years, the krona’s exchange rate is expected to slowly strengthen,” the bank said. central.

Even before the COVID-19 pandemic, between 2013 and 2020, the SEK depreciated sharply due to falling interest rates and quantitative easing by the Riksbank. In an earlier report, the Riksbank said that the depreciation of the SEK over the said seven-year period “is a puzzling phenomenon for an advanced economy”, as the krone continued to depreciate even when the interest differential s is stabilized.

Growing use as a reserve currency

Although the Swedish economy is relatively smaller than that of its European neighbors, including Germany, the United Kingdom, France and Italy, the Swedish krona has been classified as a safe haven currency for many currency watchers.

The IMF considers the SEK the sixth non-traditional reserve currency in the world after the Australian and Canadian dollars, the Chinese renminbi, the Swiss franc and the Korean won.

The SEK is becoming increasingly viable as a reserve currency as the US dollar’s dominance has steadily declined over the past two decades as central banks shift to non-traditional currencies, according to a recent report by the Fund. international currency.

The US dollar’s share of official reserve assets has declined over the past two decades, which the IMF has attributed to the increased share of non-traditional reserve currencies like the SEK, he said.