LONDON—The Swedish crown weakened sharply on Wednesday after the country’s central bank was less hawkish than expected, while the euro rebounded from losses a day earlier when jitters about the U.S. banking sector helped the safe-haven dollar.
The euro rose as much as 1.05 percent against the crown to 11.426, set for its biggest one-day gain since early March. The dollar, which traded down 0.7 percent against the crown before the Riksbank’s decision, was steady at 10.305 crowns.
Sweden’s central bank raised its policy rate by half a percentage point to 3.50 percent in line with market forecasts, and said it expected a further hike at its meeting in June or in September, but two deputy governors voted for a smaller hike.
“This dovish dissent is a recipe for more weakness against the euro because of the rate differential,” said Kenneth Broux, head of corporate research for FX and rates at Societe Generale.
Market expectations are for further rate hikes from the European Central Bank. The difference between rates in one market and another are factors in driving currency moves.
The Norwegian crown “is also getting caught in the crossfire, and I think the scandies can weaken more and put pressure on the central banks to jawbone their currencies (i.e. try to talk them stronger),” said Broux.
The euro climbed 0.16 percent on the Norwegian crown to a fresh three year high of 11.747.
The euro was also stronger more broadly, rising 0.57 percent against the dollar to $1.1038, while the pound rose 0.5 percent to $1.2474, both European currencies rebounding from similar size falls the day before.
The dollar index, which measures the currency against six major rivals, was down 0.42 percent at 101.38 after a 0.5 percent increase on Tuesday, as it benefited from a short-term flight to safety.
Shares of First Republic Bank slid nearly 50 percent on Tuesday after it reported a more than $100 billion plunge in deposits in the quarter, battered by lost confidence in the banking sector.
However, “the broader spillover impact looks limited—other regional bank shares have held up better—and the market sees it as an isolated incident. That’s why we’ve seen a bit of a bounce in risk assets and the dollar giving back some of yesterday’s gains,” said Lee Hardman, senior currency analyst at MUFG.
The dollar slid 0.3 percent against the yen to 133.27.
Investor attention will firmly be on the slate of central bank meetings in the next few weeks with the Bank of Japan, under the new Governor Kazuo Ueda, holding its policy meeting later this week.
The Australian dollar slid to a six-week low of $0.65955 after data showed inflation eased from 33-year highs in the first quarter, while core inflation dipped below forecasts. ING economists said a cooler-than-estimated inflation report should be enough to “encourage thoughts that the recent pause in rate tightening by the Reserve Bank of Australia (RBA) may end up being more than that, and confirm that 3.6 percent was the peak in rates this cycle.”
