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Króna Will Likely Rise Again after Dip

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Króna Will Likely Rise Again after Dip

Icelandic money

Photo: Geir Ólafsson.

Despite a recent drop in the value of the Icelandic króna, it is likely to keep rising in the long term, according to Daníel Svavarsson, an economist at Landsbankinn bank, RÚV reports.

The króna fell sharply on Wednesday, by 1.8 percent. The US dollar has recovered to above the 100 króna mark, and the króna has depreciated by 5.2 percent since the beginning of the month. Fluctuations in the exchange rate have increased significantly, but the króna is still stronger now than it was at the beginning of the year. Daníel believes the exchange rate has not yet stabilized, following the abolition of capital controls.

“With nearly full lifting of capital controls, volatility has increased considerably, fluctuations in the exchange rate of the króna, without there necessarily being anything unnatural in this itself, considering, for example, the exchange rate of the Norwegian krone against the euro or the Swedish krona,” explained Daníel.

However, Daniel pointed out that the capital controls have not been fully lifted. Funds can now flow out of the country, but there are still obstacles in transferring money to Iceland. Therefore, the exchange rate has not yet stabilized.

Daníel does not believe that the recent weakening of the króna can be explained by trade in goods and services—i.e., the level of exports or imports of consumer goods or how much foreign currency tourists bring into the country with them. He thinks it more likely that the decline is related to so-called flow factors—for example, how much foreign currency export companies convert to króna.

There could be other important factors too, in Daniel’s opinion. “Maybe certain psychological thresholds also play a part. The value of the dollar approaches 100 krónur. This is one such certain milestone. People probably look for a bottom there. And the euro around 110—there seems to be some resistance at that level.”

However, Daníel went on to say: “I find it difficult to read short-term fluctuations, but from a long-term perspective, I highly doubt that the króna has peaked yet.”

Króna appreciation has often been attributed to large foreign currency inflows due to growth in tourism in Iceland. Although tourism certainly does contribute to a positive current account balance, Daníel believes the strengthening of the króna over the past two years has had little to do with growth in tourism, but rather capital inflows—foreign investors investing in Icelandic companies.

“But at the same time, there is no reduction in currency inflows from tourism, just the opposite. Although one can read in the news that it’s all on the downturn there [in the tourism industry]. On the contrary, inflows are still increasing rapidly. In just the first five months of the year, foreign currency inflows have increased by 50 percent compared with the same period last year, if we look solely at the amount of currency that is coming in via tourism,” explained Daníel.

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