February 12, 2016 / 10:58 AM / 2 years ago

Effect of Riksbank's deeper rate cut proves fleeting as crown rebounds

LONDON, Feb 12 (Reuters) - The Swedish crown recovered on Friday all the ground it lost against the euro when the central bank cut interest rates the previous day, reinforcing a view that there are limits to how far negative rates alone can weaken currencies.

The crown hit a six-month low of of 9.6145 crowns per euro immediately after the Riksbank announcement. However, it traded on Friday at 9.4370 crowns per euro, up 0.5 percent on the day and firmer than before the central bank move.

The Riksbank is the latest central bank to discover negative rates cannot guarantee a weaker exchange rate and push up inflation, especially when many monetary authorities are trying to weaken their currencies at the same time.

In late January, the Bank of Japan adopted negative rates for the first time, following the Swiss National Bank, the European Central Bank, Denmark's central bank and the Riksbank.

But the yen, often sought as a shelter from market turmoil, has risen about 7 percent against the dollar this month.

The euro, meanwhile, is trading about $1.13, its strongest since October, even though the ECB is widely expected to cut its deposit rate by at least 10 basis to -0.4 percent in March.

The Swiss franc is also near its highest in four months against the dollar.

Sweden's central bank on Thursday lowered its benchmark rate to -0.50 percent and promised to do more. Economists had expected the rate to be cut to -0.45 percent, its fourth cut in a year, partly to offset the effects of the ECB policy loosening forecast for March.

"We continue to look for a stronger Swedish crown as more aggressive Riksbank rate cuts seem unlikely, in our view," Barclays analyst, Nikolaos Sgouropoulos, said. He said Barclays was looking to buy crowns and sell euros ahead of the ECB's March and June monetary policy meetings.

The Riksbank has in the past sought to weaken the crown to help push up inflation, which has been flat or falling for most of the last three years despite robust economic growth. The central bank targets inflation of 2 percent.

But those efforts to weaken the crown have proved fleeting.

When Sweden first cut rates to negative last February, the crown fell to about 9.70 crowns per euro, before rising sharply to 9.06 crowns by mid-March as the ECB launched its asset-purchase programme. There was a similar brief easing of the crown after the Riksbank's most recent cut, in July. (Editing by Louise Ireland)

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