US Dollar Rallies Against Krone After Rate Cut
Earlier today Norges Bank, the central bank of Norway, announced that it would cut the key policy rate by 25 basis points to 1.5%. The central bank also said that "a substantially stronger krone may also result in further interest rate cuts."
The announcement shook the currency market and USD/NOK is up 2.3%, EUR/NOK up 1.9%, and NOK/JPY down 1.3% on the session. Prior to the rate cut, the Norwegian krone was seen as a strong currency, as several other central banks, such as the Bank of Japan, ECB, and Bank of England had done monetary easing.
The trend seems to be that any central bank, which has seen its currency appreciate, has ended up using monetary easing to devalue the currency. For example, the Swiss National Bank intervened last fall after the franc appreciated against the euro and US dollar and Bank of Japan announced earlier this year that it would pump 10 trillion yen into its economy to fight the deflation.
Hence, it can be difficult for investors to find the next strong currency that could serve as “safe haven.” The Swedish krona may get stronger because Sweden is one of the few strong economies in Europe that is not a part of the monetary union. However, Sweden is very dependent on its exports that make up close to 50% of its GDP. Thus, its central bank, Riksbank, is like to intervene if the krona appreciates too much.
However, there is one more currency left to look at. The US dollar has depreciated approximately 32% since April, 2002, but the recent actions by the foreign central banks and financial crisis in Europe have made it attractive again. Additionally, the Fed cannot cut the interest rates any further, as they are already at 0% and the recent economic data is indicating that the US economy is strengthening rapidly.
These factors have already moved the dollar index 1.5% higher year-to-date and the trend is pointing upwards. Scotia Bank's Chief Currency Strategist, Camilla Sutton also notes that “the only true safe haven is the USD. A safe haven needs a very large and highly liquid bond market; the US hosts the deepest capital markets in the world.”
Also Russell Bloom, who is a Managing Currency Analyst for Action Economics, points out that “the dollar is likely to benefit substantially from improving U.S. fundamentals.” Bloom continued by saying that “The SEK (Swedish krona) can outperform, but I do not expect it to perform as well as USD. As the U.S. economy picks up money that was parked in Sweden may actually head back to U.S. and other emerging market countries.”
Traders who are not familiar with currency trading can get exposure to the US dollar by investing in PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP).
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