According to Statistics Norway, from the end of 2019 to the end of 2023, the Norwegian krone weakened by more than 10 percent against the euro and the dollar. This means that the exchange rate of the koruna is currently terrible.
Global finance, oil price, differences in feet interest rates and the price level in relation to abroad - all this affects the level and development of the Norwegian krone.
What influences the exchange rate of the Norwegian currency?
Norwegian krone exchange rate, is of great importance for the economic development of this country. Norway is a small, open economy. However, a weak koruna exchange rate may be beneficial for some and unfavorable for others. Norway had higher interest rates than many of its trading partners for many years, which meant a positive interest rate differential. However, in recent years, several central banks, including the American central bank (Federal Reserve) and the European Central Bank (ECB), raised interest rates more than Norges Bank. This resulted in a change in the percentage difference.
The interest rate is the return on capital. The percentage difference is therefore an important factor for investors looking for maximum return on their investment. A change in the percentage difference may induce investors to move capital out of Norway, which may lead to lower demand for the Norwegian krone. This may explain the weaker koruna exchange rate not only in the short term, but also in the long term.
Sale of crowns by Norges Bank
The Norwegian government receives large tax revenues in kroner. Oil companies receive revenues in dollars. Companies must exchange part of their earnings for kroner to pay taxes and fees to the Norwegian state. This creates demand for corona, which insulatingly strengthens the corona.
However, Norges Bank has to convert tax revenues from the oil sector back into dollars to invest the money in the oil fund, which could weaken the krona. The timing of these surgeries may affect the crown in the short term. Some market participants may perceive large sales crowns by Norges Bank as a negative signal. Operations Norges Bank usually attract more attention on the market than transferring money the other way in the form of tax payments to the Ministry of Finance.
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Oil price
According to economic theory, a permanent increase in oil and gas prices may contribute to the strengthening of the exchange rate through a more favorable so-called exchange relationship with foreign countries. Conversely, a reduction in oil and gas prices may lead to a weaker krona exchange rate.
At the same time, the relationship between oil prices and the krona exchange rate depends on how much the national economy depends on the oil sector. In Norway, we have an oil fund that helps reduce the dependence of the krona exchange rate on the price of oil.
In recent years, Norway's gradual reduction in economic dependence on the oil industry may also contribute to a weakening of the link between the krone exchange rate and oil prices. Uncertainty about future oil demand, as well as uncertainty about the impact of climate policy on the Norwegian economy, may make the Norwegian krone perceived as riskier.
Price level increase in Norway
In the long run, economic theory says that a country's exchange rate will develop in line with the level of prices and costs compared to abroad. Among economists, this is called the equivalence of purchasing power hypothesis between countries.
If the price level in a country increases faster than in other countries, there is a tendency for the country's currency to weaken in the long run. Price level increase in Norway insulatingly leads to a weaker corona in the long run.
Foreign direct investment
Foreign direct investment means that companies or individuals invest in businesses or real estate in another country. These investments had a negative development in Norway. More is invested in other countries compared to what flows in investment to Norway. This affects the exchange rate of the krona. Negative capital flows mean that investors see less potential in the Norwegian economy compared to the euro area.
How will the koruna exchange rate develop?
It is difficult to predict the development of the koruna exchange rate in the future.
Economic models have difficulty predicting future exchange rate movements, which is often called the Meese-Rogoff puzzle in the scientific literature. Today's rate is often the best forecast of the future rate.
The advantage is that when the krone exchange rate weakens, Norwegian goods are relatively cheaper compared to goods from other countries. This means that Norwegian companies receive more kroner for goods sold abroad. Exports constitute a large part of Norway's overall gross domestic product.
However, a weak koruna exchange rate may bring some inconvenience. This may particularly affect individuals and households. A weaker koruna exchange rate meansthat goods imported into Norway are becoming more expensive. This causes prices to increase, which negatively affects real wages.
The weak exchange rate of the krona also means that you have to pay more for trips abroad. This applies to everything from services such as car rental, restaurants and accommodation, to the purchase of souvenirs and works of art.
What influences the koruna exchange rate?
While it is difficult to say why the krona exchange rate is exactly what it is today and to forecast its future development, there are certain factors that economists believe influence the krona exchange rate both in the short and long term.
Short term: Global uncertainty, differences in interest rates with foreign countries, sale of crowns by Norges Bank.
Long-term: Price level in relation to abroad, oil price, foreign direct investment.
Global uncertainty
Rational investors strive to maximize return on capital while minimizing risk. International players want to invest in currencies that are considered stable and safe (safe havens), such as the US dollar or euro.
The Norwegian krone is a smaller currency compared to the dollar and euro. In certain situations, players may therefore perceive the crown as a more uncertain place to invest. This may make the Norwegian krone seem riskier to invest in.
Isolatingly, increased international uncertainty may increase concerns about investing in small currencies. The Swedish krona, also a relatively small currency, weakened almost as much as the Norwegian krone.
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Source: Statistics Norway (SSB), Photo: Wojtek Sobieski
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