Sweden’s central bank criticized as ‘dovish’ policy sends currency into a tailspin


Sweden's crown became the world's second-worst performing currency in October behind sterling, with analysts lambasting the country's central bank and telling CNBC that it was supporting a "zombie landscape".

'Zombie landscape'

The U.S. dollar spiked to 9.08 against the Swedish crown (SEK) on October 27 as Sweden's central bank, the Riksbank, left its interest rate unchanged at -0.5 percent. As a result of the announcement, the krona dropped to lows not seen in over seven years against the greenback.

Henrik Unell, a chief analyst at Nordea Bank, told CNBC on Wednesday that this weakness for the currency is a direct consequence of the Riksbank's actions.

"Right now, we have importers paying exporters," said Unell as he explained that many clients produce in China and regularly attempt to sell in SEK from abroad. He went on to say, "This is a policy choice that the Riksbank makes and this leaves us with a zombie landscape for businesses in which the SEK is turned into confetti."

"There are plenty of long-term consequences as a result of this. No productivity, good capital chasing bad … It all impairs long-term economic growth and we haven't even mentioned house prices," Unell added.

Negative rates

The Riksbank argued at its October meeting that an upturn in the Swedish economy is continuing. Gross domestic product (GDP) for the Scandinavian country is strong, employment continues to rise and a healthy trade surplus should, ordinarily, aid the currency.

Sweden's Riksbank sparked controversy among investors in recent years by becoming one of the economic pioneers of negative interest rates. Denmark, Switzerland, Japan and the euro zone have all adopted similar strategies since, though Sweden could be about to go even further into negative territory with its next central bank meeting on December 21. A cut of 10 basis points, as predicted by Nordea Bank, would result in an interest rate for the Scandinavian nation of -0.6 percent.

'Most dovish' central bank in the world

Ian Johnson, a foreign exchange strategist with Roubini Global Economics, told CNBC in a phone interview that he was surprised with just how dovish the Riksbank had been at its October meeting.

"They must be the most dovish central bank in the world at the moment but they are a law unto themselves and we are just observers," he said.

"We are amazed (at the SEK weakness) … But you cannot fight the market," he added.

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