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Sweden and Norway’s currencies have become a favourite way for traders to bet on a European economic revival, outstripping other major peers since the start of the year as lawmakers across the region promise a spending spree.
The Swedish krona has climbed more than 10 per cent against the US dollar this year, putting it on track for its biggest quarterly rise since 2010, while the Norwegian krone has risen more than 8 per cent, its largest jump in more than two years.
That makes them the best-performing of the G10 group of developed market currencies this year, ahead of the euro and the pound, as investors bet on a higher path for interest rates in Scandinavian countries and a tailwind from the major spending push promised by Germany and other big economies.
“The Scandi currencies are simply the euro on steroids,” said Kamal Sharma, an FX strategist at Bank of America.
Germany’s huge spending plan — which has fuelled hopes of a boost to European growth — will have a particularly positive impact on Sweden, which has a large defence sector, he added.
As a proportion of its economic output, Sweden’s weapons exports last year were not far behind those of France, the world’s second-largest major arms producer after the US, according to data from the Stockholm International Peace Research Institute and calculations by SpareBank 1 Markets. Stockholm has also announced it will increase its own military spending to 3.5 per cent of GDP by 2030.
Norway’s krone has also been helped by its defence sector, while its steel and aluminium industries are set to gain from Europe’s infrastructure push, analysts said.
The currencies’ gains mark a reversal from last year, when the Norwegian krone was close to record lows against the dollar and euro, barring dramatic falls only seen during the early days of the coronavirus pandemic.
“The moves over the last weeks have been really big . . . it has been surprising,” said Dane Cekov, an FX strategist at SpareBank 1 Markets, adding good governance and a stable fiscal outlook “while the US is messy” have increased their attractiveness to investors just as US President Donald Trump’s administration has shown itself willing to jeopardise international relations.
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BofA expects the Swedish and Norwegian economies to grow 1.8 per cent and 1.5 per cent next year respectively, compared with 1.1 per cent for the Eurozone.
The expected boost to the Scandinavian countries’ economies has helped lift the share prices of the countries’ military companies, such as Saab, up more than 70 per cent since the beginning of the year, and Norway’s Kongsberg Gruppen, up more than one-fifth.
Higher than expected inflation in both economies in recent weeks has also been a “wake-up call” for their central banks to keep interest rates higher for longer, said Magne Østnor, an FX strategist at DNB Markets.
Markets expect the European Central Bank to make at least two quarter-point cuts by the end of the year. In contrast, only one cut is fully priced in, with a chance of a second, for Norway’s Norges Bank, while Sweden’s Riksbank is not expected to reduce rates at all this year. Norway’s central bank on Thursday kept interest rates on hold at a 17-year high of 4.5 per cent.
The lightning rally in the currencies has also been helped by a broad weakening in the dollar as investor concerns have grown that Trump’s aggressive trade tariff plans could harm the US economy.
Central bank officials in Sweden and Norway privately say they are somewhat unsure of the reasons for their currencies’ particularly strong recent performance. The Norwegian krone has historically strengthened with oil prices, but since the beginning of the year Brent crude, the global benchmark, is down slightly.
Brad Bechtel, global head of FX at Jefferies, said the outperformance was partly a reflection that the currencies had been “ultra undervalued” before the recent spending catalyst.
Additional reporting by Richard Milne and Ray Douglas
