The strength of the Swedish Krona and Norwegian Krone against various forex pairs in 2025

Trying to Understand the Performance of both the Swedish Krona (SEK) and Norwegian Krone (NOK) against various forex pairs in 2025.

The strength of the Swedish Krona (SEK) and Norwegian Krone (NOK) against various forex pairs in 2025 can be attributed to a combination of economic, monetary, and external factors. Below is a detailed analysis of the key reasons based on available information:

  1. Strong Economic Fundamentals

  • Sweden:
    • Economic Recovery: Sweden’s economy is expected to experience an upswing in 2025, with nominal GDP growth projected at 1.8%, significantly higher than in 2024. Falling inflation and unemployment are also supporting the SEK, as these factors bolster investor confidence in Sweden’s economic stability.
    • Stable Public Finances: Sweden’s well-managed public finances and strong economic fundamentals, including a well-educated workforce and competitive export sector, contribute to the perception that the SEK is undervalued (by 10-15% according to some estimates). This undervaluation is expected to drive appreciation over time.
    • Current Account Surplus: Sweden’s strong export sector drives a current account surplus, which supports the SEK’s value by increasing demand for the currency in global trade.
  • Norway:
    • Resilient Economy: Norway’s economy benefits from its position as a major oil and gas exporter. High energy prices, particularly for natural gas, have strengthened Norway’s current account surplus, supporting the NOK.
    • Robust Fundamentals: Norway’s fiscal discipline, low debt levels, and high foreign currency reserves enhance the NOK’s appeal as a “quality” currency, despite short-term volatility.

  1. Monetary Policy and Interest Rate Differentials

  • Sweden:
    • Riksbank Policy: The Swedish central bank (Riksbank) has adopted a hawkish stance in response to inflationary pressures, which has supported the SEK. While the Riksbank cut rates in May 2024, it has signaled limited further easing to avoid weakening the SEK further, especially as inflation remains a concern.
    • Interest Rate Advantage: The European Central Bank (ECB) is expected to continue lowering its key interest rate in 2025, potentially falling below Sweden’s, making the SEK more attractive to investors seeking higher yields.
  • Norway:
    • Norges Bank’s Hawkish Stance: Norges Bank has been more aggressive than other developed market central banks, raising rates earlier (starting in 2021) and maintaining a tighter policy to counter inflation and support the NOK. The interest rate differential (e.g., ~125 basis points over the Eurozone) makes the NOK appealing for carry trades.
    • Currency Support: Norges Bank has explicitly linked its policy rate to NOK stability, stating that a weaker NOK could lead to prolonged inflation, potentially necessitating further rate hikes. This commitment enhances investor confidence in the NOK.

  1. External Factors and Market Sentiment

  • Fading Domestic Risks: Both the SEK and NOK have benefited from reduced domestic risks, such as stabilizing energy markets in Europe (particularly for Norway) and a more favorable global economic outlook. Softer U.S. economic data and expectations of Federal Reserve rate cuts have reduced pressure on Nordic currencies, which previously weakened due to a strong U.S. dollar.
  • Speculative Momentum: The SEK’s recent strength has attracted trend-following investors, amplifying its appreciation. Once the SEK began to strengthen, speculative capital flows further boosted its value.
  • Global Trade Dynamics: Norway’s oil and gas exports make the NOK less sensitive to global trade disruptions, such as potential tariffs under the Trump administration, compared to the SEK, which is more exposed to trade swings. This relative resilience supports the NOK’s strength.
  • Defense Industry Interest: In Sweden, increased investor interest in the defense sector, driven by Europe’s geopolitical rearmament, has supported capital inflows, strengthening the SEK.

  1. Currency-Specific Factors

  • Swedish Krona (SEK):
    • Undervaluation Correction: The SEK has been considered undervalued by 10-20% against major currencies like the EUR and USD, based on economic fundamentals and models like the IMF’s trade-weighted assessments. This undervaluation has driven expectations of long-term appreciation.
    • Capital Flows: Swedish investors’ preference for foreign assets has historically weakened the SEK, but potential repatriation of savings by households (especially retirees) could boost demand for the SEK in the longer term.
    • Stock Market Performance: The Stockholm 30 Index’s recovery and potential to reach new highs signal economic optimism, indirectly supporting the SEK, though the correlation is weak.
  • Norwegian Krone (NOK):
    • Oil and Gas Influence: Norway’s role as a major energy exporter ties the NOK’s value to commodity prices. Stable or high oil and gas prices in 2025 support the NOK, despite occasional volatility from global energy market shifts.
    • Sovereign Wealth Fund Dynamics: Norway’s Government Pension Fund Global invests oil revenues abroad, which can weaken the NOK by reducing domestic currency circulation. However, Norges Bank’s foreign currency purchases to sterilize these revenues help stabilize the NOK.

  1. Performance Against Specific Forex Pairs

  • Against the Euro (EUR): Bank of America forecasts EUR/SEK at 10.40 and EUR/NOK at 11.00 by year-end 2025, reflecting expected appreciation due to stronger fundamentals and monetary policy support. The SEK’s lower exposure to global trade risks compared to the NOK gives it a slight edge in some scenarios.
  • Against the U.S. Dollar (USD): The SEK has strengthened by over 16% against the USD in 2025, driven by a cooling U.S. economy and expectations of Fed rate cuts. The NOK has also outperformed the USD, supported by Norway’s energy-driven economy.
  • NOK/SEK Pair: The NOK/SEK exchange rate is expected to face downward pressure (favoring SEK) in the short term, with Bank of America forecasting 0.91 by mid-2025 before recovering to 0.95 by year-end, indicating a stronger SEK relative to NOK due to Sweden’s broader economic recovery.

 

  1. Risks and Challenges

  • Sweden: A stronger SEK could hurt export competitiveness, especially amid global trade uncertainties like potential U.S. tariffs. The Riksbank’s limited ability to raise rates further to support the SEK (due to interest rate-sensitive sectors like real estate) may cap its strength.
  • Norway: The NOK’s high sensitivity to global risk sentiment and oil price fluctuations introduces volatility. A potential oversupply of U.S. and Russian gas could pressure Norway’s energy exports, weakening the NOK.
  • Data Surprises: Unexpected economic data (e.g., U.S. inflation or growth surprises) could reverse gains for both currencies, as seen earlier in 2024 when U.S. strength weakened Nordic currencies.

Conclusion

The strength of the Swedish Krona and Norwegian Krone in 2025 stems from robust economic fundamentals, supportive monetary policies, and favorable external conditions. Sweden’s stable finances, export surplus, and expected economic upswing drive SEK appreciation, while Norway’s energy exports and hawkish central bank bolster the NOK. Both currencies are expected to continue strengthening against major pairs like EUR and USD, with the SEK potentially outperforming the NOK in the short term due to its broader economic recovery and lower trade sensitivity. However, global trade risks and commodity price volatility could introduce challenges