Norway's crown leads charge vs US dollar after rate hike

London

NORWAY'S crown led currencies against a struggling US dollar on Thursday after the Norges Bank became the first central bank in the developed world to raise interest rates in the post-pandemic era.

Norway's decision to hike interest rates a quarter of a percentage point to 0.25 per cent overshadowed a decision by the US Federal Reserve to start tapering its bond purchases by November, which sent the dollar weakening broadly against its rivals.

The crown rallied to its highest levels since mid-June versus the euro to 10.07 crowns per euro while it climbed 0.7 per cent against the US dollar.

"While today's rate decision didn't come as a surprise to markets, the upwards revision to its projected policy path beyond June 2022 despite the sub-target inflation projection did," said Simon Harvey, senior FX market analyst at Monex Group. "This is what largely moved the needle for the crown this morning."

The dollar's losses also widened after a report that Chinese regulators have asked China Evergrande Group to avoid a near-term default on dollar bonds. Regulators in a recent meeting with Evergrande executives said the company should communicate proactively with bondholders to avoid a default, but did not give more specific guidance, Bloomberg Law reported.

Against a basket of its rivals, the dollar weakened 0.4 per cent to 93.14. The brunt of its losses were against the Canadian dollar and the Scandinavian currencies.

At a widely expected meeting this week, nine of the US central bank's 18 policymakers projected borrowing costs will need to rise next year, inducing markets to bring forward the timing of the first rate rise to January 2023.

The dollar and bond yields however, fell, with many seeing the Fed as having left some policy wiggle room to slow down if needed.

"A lot of the dollar strength we saw on Sept 17 and Sept 20 was down to risk aversion. The Fed slightly raised its median (interest rate) expectations for 2023 but you are still talking of a terminal rate of 1.5 to 1.7 per cent which is okay but not (a) situation where you get an aggressive bid for the dollar," said Peter Kinsella, head of FX strategy at asset manager UBP.

The euro was up at US$1.1721, a month high while sterling also rose ahead of a Bank of England meeting which is expected to strike a hawkish tone. REUTERS