Foreign-exchange traders becalmed by central-bank largesse arefinding that even currencies from Group of 10 nations are about ashard to escape as emerging markets once volatility rises.

Norway's krone is the biggest loser among 31 currencies trackedby Bloomberg since June 18, the day before the Federal Reservesignaled it may reduce its stimulus measures this year, falling 5.8percent against the dollar and 3.2 percent versus the euro.Sweden's krona posted the second-biggest drop. The declinesexceeded those of the Polish zloty and Indian rupee.

As two of the three least-traded G-10 developed-nationcurrencies based on the latest triennial survey by the Bank forInternational Settlements, the krone and krona trapped investorswhile the Fed roiled markets worldwide. As long as central bankswere tamping down volatility by providing unprecedented stimulus,traders were confident to take ever bigger risks by wading intohard-to-trade currencies.

“In relatively low-liquidity currencies, such as theScandinavians, you get these big moves when all the investors wantto rush through the same exit door,” Thomas Kressin, theMunich-based head of European foreign exchange at PacificInvestment Management Co., which oversees about $2 trillion, saidin a June 24 phone interview.

Traders who use debt to amplify returns in the krone and kronalikely exacerbated the declines by being forced to sell to meetmargin calls, Kressin said.

The two Nordic currencies accounted for just 3.5 percent of the$4 trillion of average daily turnover in foreign-exchange marketsin the three years to 2010, the Basel, Switzerland-based BIS said.The krone was little changed at 6.0890 to the dollar as of 9:19a.m. in New York, while the krona traded at 6.7026.

“Liquidity is very shallow in the Scandies,” Lee Oliver, aLondon-based director at Citigroup Inc., wrote in thesecond-largest currency trader's FXWire client note on June 24.

Scandinavian midsummer public holidays meant many local tradersand investors were absent from their desks at the end of last week,compounding the lack of liquidity, according to Richard Falkenhall,a strategist at SEB AB in Stockholm.

Exiting Trades

“This is a move related to foreign investors” exiting trades,Falkenhall said in a June 24 phone interview. “Probably there weremore longs in these trades than we thought,” he said, referring tobets an asset will rise.

Fed Chairman Ben S. Bernanke said last week the central bank maypare its unprecedented bond-buying program this year and end it inmid-2014 if the economy improves in line with its expectations. Hiscomments after the Fed's June policy meeting sparked a selloff inrelatively high-risk assets on speculation there will be less cashcirculating in the global economy.

Norway's krone slipped to 6.1737 per dollar, the weakest levelsince December 2010, and a 2-1/2-year low of 8.0819 per euro onJune 24, before rebounding the most in more than a week yesterday.The Swedish krona dropped to a seven-month low of 6.8018 per dollarand a one-year low of 8.8990 versus the euro, before rising for thefirst time in four days yesterday.

Sweden's currency will end the year at 6.69 per dollar and 8.46versus the euro, while Norway's krone will be at 5.92 and 7.45,according to median estimates of analysts surveyed by BloombergNews.

Rising Volatility

The JPMorgan Global FX Volatility Index, which measures priceswings in currencies, rose as high as 11.96 this week from a morethan five-year low 7.05 in December.

The lack of liquidity also pushed up price swings in the Nordiccurrencies. Three-month volatility in the Norwegian krone versusthe dollar jumped 33 percent in the past week, and swings inSweden's krona rose 11 percent, Bloomberg data show.

The currencies have been weakening since about the end of thefirst quarter, even as Sweden defies the recession in the euroregion and Norway benefits from oil revenues that bolstered its$730 billion sovereign wealth fund, the world's largest.

Swedish Finance Minister Anders Borg said that he welcomes aweaker exchange rate.

“I don't mind the krona weakening a little bit when we seeproblems in the world economy,” Borg said yesterday in a phoneinterview with Bloomberg Television's Francine Lacqua and GuyJohnson. “We don't have a strong krona policy. We believe that themarket should set the rate.”

Prime Minister Fredrik Reinfeldt echoed that sentiment, sayingyesterday said the krona's recent slump has brought relief toexporters after the government ruled out tampering with theexchange rate.

Sweden's Riksbank has refrained from lowering interest rates,which tend to reduce the appeal of a currency, at its last twopolicy meetings. Gross domestic product increased 0.6 percent inthe first quarter, up from 0.1 percent in the previous three monthsand compared with a 0.3 percent estimate in a Bloomberg Newssurvey.

Norway will grow 2.4 percent this year and 3 percent in 2014,Statistics Norway forecast on May 30. Its central bank, NorgesBank, has kept inflation below its 2.5 percent target sincemid-2009, even as it signaled it may lower its deposit rate from1.5 percent. That's putting pressure on the krone.

“We are dealing here with fundamentally sound currencies,” saidPimco's Kressin. “Once the positions are washed out, investors willhave opportunities to buy these currencies at really attractivelevels. For long-term investors, this is a great opportunity.”

No Target

Norges Bank Governor Oeystein Olsen said June 21 he has nospecific target for the krone even as he acknowledged policy makerswere aware they would trigger a slump by lowering the outlook forborrowing costs.

Bilal Hafeez, the head of global foreign-exchange strategy atDeutsche Bank AG, the biggest currency trader, said the Germanlender's data show a build-up of positions in Nordic currenciesthat still need to be unwound.

“Some of the largest positioning going into the Fed was in theScandinavian currencies,” Hafeez said in a phone interview on June24. “The market is exhibiting a lot of risk-aversion and positionunwinds. Unless we get stabilization in that, or a shift in thedomestic story within Scandinavia, I don't think one should try tofade these moves.”

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