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Strong Norway crown lands c.bank with rate dilemma

Published 01/12/2010, 09:55 AM
Updated 01/12/2010, 09:57 AM

By Aasa Christine Stoltz

OSLO, Jan 12 (Reuters) - Norway's crown has hit a 16-month peak but further gains are uncertain as the country's central bank balances the need to manage the pace of economic recovery against calls from exporters to keep the currency in check.

Driven by a rising oil price and the prospect of higher interest rates, the crown has risen around 5 percent against the euro since the end of November 2009 and a whopping 20 percent from lows hit during the global crisis in late 2008.

On Tuesday it reached a 16-month high against the single currency, hitting 8.1280 before easing to 8.1975, and to 5.6565 against the dollar, by 1449 GMT.

The currency of the world's No. 5 oil exporter and Europe's second largest gas supplier reached 5.5857, its strongest level against the greenback since Dec. 3, earlier this week.

Last October Norway became the first western European state to raise rates since the economic crisis, and in December it surprised financial markets by raising its main rate by another quarter point to 1.75 percent - a move that most analysts expected in February or March 2010.

Thanks in part to the growing rates differential with the rest of Europe, Norway's biggest bank, DnB NOR, expects the crown to strengthen to about 8.00 to the euro during 2010, though it expects a correction in the short term and says the upwards trend could limit scope for further rate hikes.

"We think the strong crown will slow Norges Bank down, so there will only be one more rate rise after the (expected) March rise," DnB NOR Markets analyst Maren Romstad said.

Eric Bruce, chief analyst at Nordea Markets, forecast the crown would ease slightly to 8.20-8.25 to the euro in the short term and lose more ground over a 12-month perspective.

He sees rates at 2.75 percent in about a year's time.

FUNDAMENTALS AND EXPORTERS

First Securities economist Bjoern Roger Wilhelmsen said the crown was now about 3 percent stronger against a basket of currencies than envisaged by Norges Bank. If the difference widens to about 5 percent, rate hikes may be scaled down.

"There is a risk that if crown appreciation goes too far, Norges Bank may lower its rate path because clearly the Norwegian export sector is struggling and the stronger crown will push down inflation going forward," Wilhelmsen said.

Business groups have repeatedly warned that they may be priced out of export markets if the crown continues to appreciate, and the finance minister has also voiced concern about keeping Norway's non-oil economy competitive.

The central bank said in December that should the crown appreciate "considerably more than projected," rates may rise more gradually or more slowly than be envisaged.

With oil around $80 per barrel and the Norwegian economy in recovery mode, unlike many other countries in the region that are still emerging from crisis, the crown's fundamentals remain buoyant and attractive for yield-hungry foreign capital.

"The upswing in Norway's economy will be relatively strong compared to many other places," Romstad said. In late 2008 and early last year the crown weakened as risk-averse financial players exited less liquid currencies like the "Nokkie".

Any significant increase in the oil price, however, could stoke further crown gains as Norway's economy depends on high investment spending in its vast offshore oil and gas sector.

Furthermore, investors are drawn to the crown because of Norway's huge current account and fiscal surpluses, set against a backdrop of growing debt burdens across western Europe.

New data this week showed core inflation rose 2.4 percent in the 12 months to December, unchanged from November but more than expected by most analysts in a Reuters survey, adding to pressure for rate hikes and pushing the crown higher.

Norges Bank forecast rates would remain at 1.75 percent until March, signalling no rate rise at its Feb. 3 meeting. Most economists expect the bank to raise rates on March 24, and what comes after that remains unclear.

(Reporting by Aasa Christine Stoltz; editing by John Stonestreet)

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