Swedish Prime Minister Fredrik Reinfeldt said countries that try to protect their exports through currency manipulation are prolonging competitive disadvantages that exchange rates can’t fix.
“This is a discussion that is ongoing in the world, but the way to deal with currencies is that they should be market valued,” Reinfeldt said in an interview in Reykjavik yesterday. “Then the politics will have to react to the competitive problems in other ways.”
Since Brazil’s Finance Minister Guido Mantega more than a month ago said there’s a global “currency war,” policy makers in Europe, the U.S. and Asia have tried to prevent a wave of outright protectionist measures that would undermine trade relations. Group of 20 Finance Ministers and central bankers last month vowed to avoid “competitive devaluation,” leaving the details to government leaders at a Nov. 11-12 Seoul summit.
“Sweden has moved on from the idea that you can only maintain competition through currency manipulation,” Reinfeldt said.
Sweden’s krona is the best performer against the euro and the dollar since mid-June of the 16 major currencies tracked by Bloomberg, having gained 2.6 percent against the euro and 17 percent against the greenback in the period. Reinfeldt signaled the gains may continue, given the outlook for Sweden’s economy.
“It is not difficult to understand the strengthening of the krona when looking at the Swedish fundamentals at a time when many other countries have deep problems,” he said.
The largest Nordic economy will expand 4.8 percent this year, the government estimates, putting it on track to deliver the European Union’s biggest rebound as it recoups most of 2009’s 5.1 percent contraction. Sweden also boasts the EU’s smallest budget deficit.
The central bank has raised rates three times since July as it steers the economy through the recovery. Policy makers lifted the benchmark a quarter point to 1 percent last month.
Still, Sweden’s output gap means the government doesn’t need to exercise the same fiscal restraint as neighboring Norway, Reinfeldt said. Norwegian Finance Minister Sigbjoern Johnsen said in an August interview the government is trying to shape economic policy to allow Norges Bank to keep rates as low as possible. A strong Norwegian krone would be “worrying,” Johnsen said at the time.
“We don’t have those kinds of capacity problems,” Reinfeldt said. “The latest inflation report shows available capacity and a very gratifying development with a higher job range.”
The Riksbank, which on Oct. 26 said it will scale back its monetary tightening plans to adjust to slower global growth and low interest rates in the U.S. and Europe, expects headline inflation to average 1.2 percent this year and 1.7 percent in 2011. That compares with the bank’s 2 percent target. Inflation, adjusting for mortgage costs, will lag behind the Riksbank’s price target for the next three years, it predicts.
Sweden has no timeline for adopting the euro. Unlike neighboring Denmark, it doesn’t peg its krona to Europe’s single currency.
Sweden’s central bank in 1992 raised its main rate to 500 percent in an effort to defend its peg in the Exchange Rate Mechanism -- a precursor to monetary union in Europe. It was forced to abandon its peg when speculation against the krona overwhelmed central bank resources.
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