Why is the Swedish Krona so Weak?

Oct. 02, 2023

During a seminar hosted by SNS and Swedish House of Finance, experts discussed the challenges of assessing the performance of the Swedish Krona, a floating currency with no inherent "fundamental value" like gold or stocks. They suggest that the currency may be undervalued and would strengthen in the longer term.

In a recent seminar hosted by SNS and Swedish House of Finance, Erik Thedéen (Riksbanken), Kristin Magnusson Bernard (AP1), and Per Krusell (IIES/ Stockholm University), discussed the Swedish Krona, which has been on a multi-year decline, reaching record lows against the Euro.

They discussed the challenges of gauging the Swedish Krona's value, particularly if it is undervalued, and identified factors contributing to its weakness. These include limited interest from financial actors, who are the primary traders of the Krona, and Swedish investors’ preference for foreign assets and currencies.

Difficulty in evaluating the value of SEK 

As a floating exchange rate, the Swedish Krona has no “fundamental value”, unlike commodities like gold or financial instruments like stocks, the speakers said.

“The fundamental value of the Krona does not exist. It's not a stock, where the fundamental value consists of the right to a company's profits. Historically, currencies were anchored to precious metals and the like,” said Krusell.

Like Krusell, Magnusson Bernard emphasized that exchange rates can be likened to a "relationship" lacking an inherent intrinsic value, in contrast to, for example, a gold reserve that backs a currency. Instead, the value of exchange rates hinges on the perception of households, companies, and investors regarding their suitability for transactions and savings.

Financial actors account fo majority of SEK Trading 

Over 90% of the trading in the Krona takes place between different financial actors in large financial centers abroad, said Thedéen.

“The consequence is that trading with the Krona is largely driven by purposes that do not necessarily attach much importance to the Krona's fundamental value. During periods, the Krona's exchange rate can therefore vary in a way that is difficult to explain with macroeconomic developments,” Thedéen said in his speech.

Magnusson Bernard, who as CEO of one of Sweden’s largest pension funds manages around SEK 440 billion, said that Swedes tend to have investments abroad.

“Swedish companies are mainly acting outside the Swedish market with income and expenses in Dollars or Euros,” she said. “Households also have a large net worth, which is often located abroad.”

When asked to give advice to Riksbanken on how to get foreign investors interested in Sweden again, Magnusson Bernard said that the central bank needs to produce clear and easy-to-understand documents that show how they think and work. The financial market trades on information and therefore it needs to be easier for foreign investors to understand the central bank's strategy.

“How do you work with the speeches? How do you work with the monetary policy reports? How do you work with the translations? It is especially important to communicate clearly when there is now a major change in strategy,” she said.

SEK undervalued, should become stronger in the future 

Citing the International Monetary Fund, Thedéen said that the Swedish Krona is undervalued compared to what is justified by the country's economic fundamentals.

“Many, including the Riksbank, assess that the krona is currently undervalued if compared to what is justified by fundamentals, i.e. the economic development in Sweden compared to that in the rest of the world,” he said. “Economic fundamentals therefore suggest that the krona should strengthen in the slightly longer term, in real terms but also nominally.”

Riksbanken had earlier announced that it would hedge about a quarter of its reserves to protect itself from losses should the Krona strengthen.

Magnusson-Bernard meanwhile, said that the Krona may get a longer-term boost from households who have their investments in foreign currencies:

“Swedish households actually assemble a fairly large net worth. And it is concentrated in households that are soon leaving working life. You can expect them to take some of these savings home, and this could lead to a strengthening of the Krona.”