The Swedish krona has been on a downward trend, with a strong dollar putting pressure on the euro, creating bleak prospects for the Swedish currency. According to the currency strategist at the American investment bank JP Morgan, a fair exchange rate between the krona and the euro would be closer to 12 than the current 11.52. However, Swedbank’s chief economist, Mattias Persson, has a different perspective. He believes that while the dollar may continue to be strong in the near term, there are good opportunities for the krona to strengthen in the long run.
Looking ahead, Persson is optimistic about the krona’s performance against both the euro and the dollar. Swedbank’s forecasts indicate that as the Swedish economy picks up steam next year, the krona could strengthen against the euro, albeit to a lesser extent against the dollar. The overall strengthening is expected to be limited, according to the bank’s latest monthly forecast.
In a year’s time, Swedbank predicts that the krona will be at 11.20 against the euro and 10.57 against the dollar, as per a recent FX forecast. The key to the krona’s uplift lies in the performance of the Swedish economy. Swedbank forecasts a GDP growth rate of 2.3% for Sweden in 2025, revised down from 2.6%, while the eurozone is expected to land at 1.3%.
Historically, a strong GDP growth rate in Sweden has often led to a strengthening of the krona against both the euro and the dollar, and this trend is likely to continue. However, for those planning a winter vacation this year, they may have to contend with a weak krona for the time being.
The road to recovery has been slow for the Swedish economy since interest rate cuts began, but signs of progress are now visible on the horizon. Swedbank anticipates a key interest rate of 1.75% next year, with Persson suggesting that even more aggressive initial rate cuts by the Riksbank could have been beneficial. Moving forward, it is crucial for the Riksbank to prioritize supporting the domestic economy to ensure a sustainable recovery and prevent further increases in unemployment.
Swedbank projects a further rise in unemployment, peaking at 8.7% by the end of the year before declining in the first quarter of 2025. Despite this, the bank remains optimistic about the potential for improvements in the economy in the coming year, contingent on the recovery gaining momentum.
Reflecting on recent monetary policy decisions, including the Riksbank’s purchases of corporate bonds, Persson highlights the need to strike a balance between stimulating the economy and managing associated risks. He suggests that while significant rate cuts may be necessary to support the Swedish economy, caution must be exercised to avoid unintended consequences. The Riksbank’s substantial purchases of corporate bonds, particularly in real estate companies, during the pandemic faced criticism for potentially contributing to a property bubble. The central bank has since reduced its holdings of corporate bonds from 12.4 billion kronor to 4.4 billion kronor, signaling a shift in its approach.
In conclusion, as the landscape of global currencies continues to evolve, the outlook for the Swedish krona remains uncertain but with potential for long-term growth. The key will be the resilience of the Swedish economy and the effectiveness of monetary policy in supporting its recovery.