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Norwegian Krone Plummets To Near 10-year Low Against Euro

Posted by seumasach on October 16, 2008

RTTNews) – In early trading on Thursday, the Norwegian krone slumped to its lowest level since January 1999 against the European currency as the Norwegian central bank lowered its key interest rate by 0.5% to 5.25% yesterday to avert an economic slowdown caused by the global credit crisis. The krone also plummeted to a 2-year low against the dollar.

In a statement accompanying the decision, the central bank Governor Svein Gjedrem said, “The crisis in international financial markets has deepened and will therefore have greater effects on the Norwegian economy than previously assumed.

Gjedrem noted that the supply of capital has also declined in Norway and it is more expensive and to some extent more difficult for banks, enterprises and households to obtain funding. Inflation remains high, but the forces that have fuelled inflation have now diminished.

Further, he said uncertainties surrounding developments ahead is unusually high and it is difficult to comment on the likelihood of different outcomes.

The Norwegian economy is now exposed to fairly major shocks, the governor said. Moreover, the central bank chief said the monetary policy meeting on October 29 will proceed as planned, and the Board will then also take a stand on the strategy ahead for the key policy rate.

During early deals on Thursday, the Norwegian krone slipped to near a 10-year low of 8.9366 against the European single currency. The next downside target level for the Norwegian krone is seen at 9.00. The euro-krone pair was worth 8.65 at yesterday’s close.

The Norwegian krone declined against the dollar in early trading on Thursday. The dollar-krone pair that closed Wednesday’s deals at 6.4138 reached 6.6189 by about 12:45 am ET. This set a 2-year low for the Norwegian krone. If the local currency weakens further, it may likely target the 6.79 level.

The dollar is likely to have been influenced by the speech given by the Fed Chairman Ben Bernanke yesterday. Federal Reserve Chairman Ben Bernanke warned yesterday that it will take “some time” to unfreeze the credit markets. He also noted that even after credit markets return to normal, the economy is not likely to return to its potential growth right away.

In a speech before the Economic Club of New York, Bernanke attempted to soothe fears, explaining that despite the “large and complex” problems in the economy, the U.S. is well positioned to move forward. However, he warned that economic activity will be muted for a while.

“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” Bernanke said, adding a little later, “Credit markets will take some time to unfreeze.”

The Fed chairman noted that the housing market remains the main source of weakness in the economy. He also pointed out a “marked” slowdown in consumer spending and in business investment, as well as in the labor market.

Looking ahead, the Italian August trade balance and current account reports are due in the upcoming session.

Turning to the US, today will also be a busy day with the releases of the September month CPI and industrial production, Philadelphia Fed index and the NAHB housing market index for October, weekly jobless claims report.

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