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UPDATE: How long will the Norwegian krone remain weak? 

Frazer Norwell
Frazer Norwell - [email protected]
UPDATE: How long will the Norwegian krone remain weak? 
Here's when the weak Norwegian krone could complete a turnaround. Pictured are various currencies.Photo by Pawel Czerwinski on Unsplash

The Norwegian krone has been at its lowest value for three years. So how long will Norway's currency struggle against the dollar, the euro and the pound? 

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Norway's krone is down to most major currencies considerably since the turn of the year. Compared to the euro, dollar and pound, it is down around 20 percent over the past year. 

In immediate terms, this means less value for money when using the currency abroad, and in the longer term may mean higher inflation and interest rates. 

READ MORE: What does the weakened Norwegian krone mean for you?

There are a number of reasons for why the Norwegian krone has performed weakly, from Norway having a lower key policy interest rate than the US or the Eurozone, investors taking less risk, the central bank Norges Bank selling kroner and the krone falling with the stock market and oil prices. 

Some of the factors are also further compounded by Norway having a floating exchange rate. This means that Norges Bank doesn't intervene in the market to try and support the currency. 

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In contrast, some European countries have their domestic currencies tied to the euro. Norway's Scandinavian neighbour Denmark is an example of this. Here, central banks intervene to ensure that the exchange rate of their domestic currency and the euro stays the same. This is referred to as a fixed exchange policy. 

READ MORE: What is making the Norwegian krone so weak?

Some of the factors behind the krone being weak also act as hints as to when the currency could begin a recovery. First up is interest rates. Experts predict that the key policy rate could, in fact, be raised to between 3.5 and 3.75 percent. However, this would still leave the key interest rate below the US's Federal Reserve interest rate, or federal funds rate, which is set at 4.75 percent. 

Furthermore, as the financial markets stabilise, so should the Norwegian stock market and the krone. And, if oil and gas prices rise, the krone should follow suit. 

Overall It can be hard to pin down when the situation could improve for the Norwegian krone. Nordea Markets expects the krone to stay weak all the way to the summer months. It said that due to the various factors involved, the krone's recovery may not meet this time frame. 

Chief economist Elisabeth Holvik at Sparebank 1 also believes that the krone will continue to struggle in the short term. 

"There are no trends that point to the krone strengthening again. We are approaching the crisis levels from the pandemic, when the financial market in Norway was close to stopping had it not been for the US central bank creating a scheme for lending dollars to Norges Bank," she told the business news outlet DN

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Danske Bank Norway believes that the krone will rise in the more longer-term thanks to energy prices. 

"So, to summarise why the Norwegian krone is weak today, in the short term, it is due to a weak risk sentiment in 2022 and a falling interest rate differential between Norwegian and international interest rates. In the longer term, however, a secular trend with rising energy prices will gradually strengthen the krone," it wrote in an analysis.

Is the weak krone here to stay? 

While a large number of experts expect the krone to pick up in the mid-to-long term, some have said that Norway's currency could remain weak permanently.

DNB has adjusted its forecast for the krone, and says that an exchange rate of 12 kroner to the euro could become the norm in the coming years. Previously it believed the currency would pick up with oil prices and as markets become more certain

"We believe in a permanently weak krone and expect that one euro will cost twelve kroner in one year's time. The krone recovery is not over, it is here to stay and puts pressure on Norges Bank," Kjersti Haugland at DNB Markets told news publication Nettavisen

In late April 2023, one euro cost 11.74 kroner. Therefore DNB's forecast signals a potential long-term downward trend for the krone. 

Furthermore, as oil and gas make up a smaller share of Norway's economy the country becomes a less unique and attractive proposition for investors, something which helped give the krone an edge over other currencies for many years. 

"Norway is no longer as attractive to invest money in. We no longer have a special status as an economy with very high and stable growth, we have become more like other countries," Haugland said. 

Sveinung Rotevatn, an MP and deputy leader of the Liberal Party, is also worried about the future of the krone. 

"In economically demanding times, investors flee from small, vulnerable currencies such as the krone, to larger, safe currencies such as the dollar. At the same time, there is a weakened belief in the krone going forward, as the dominance of oil will disappear," he said. 

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