The Swedish Krona eased 2.94 percent against the US dollar on Friday, giving up part of the previous week's gains. The Swedish currency also eased against the British Pound by 1.39 percent and remained almost steady against the Euro, gaining a modest 0.06 percent.
Traders were enthusiastic about the Swedish Krona last week which translated to overall gains of around 4.80 percent against the dollar. Still, the pair’s reversal towards the end of the week warrants a closer look.
Focusing on the dollar, I think there are two main reasons why traders decided to abandon the Swedish Krona. The first one is the Swedish government's big failure in terms of containing the coronavirus. The second one is the current strong preference for the US dollar as a safe-haven currency.
When thinking about the first reason, it's important to highlight that, unlike other countries in Europe, Sweden decided not to put its population under quarantine and opted for giving "voluntary advice" to its population, which turned out to be a big mistake, given the concerning increase of the death toll and number of infections. There are currently 6,443 infected individuals and 373 deaths, with some analysts predicting that Sweden may end up as the country with the most deaths in Scandinavia.
The main idea was providing a 'culturally Swedish' response to the outbreak, given the special cultural characteristics of the Swedish people as they tend to live on their own. Based on this assumption, the government decided not to close down public places like cafes and restaurants and not to restrict the movement of its citizens.
Sadly, they weren't counting on the fact that the highly concentrated Somali community was prone to become a source of infection. And as we already know good sense is the least common of the senses, so relying on only one population’s common practice was probably not the best idea in the first place.
This situation reflects the failure, once more, of one of the multiple "alternative approaches" to implementing quarantine measures to contain the spread of the epidemic. This, of course, has been a fatal mistake from the Swedish government's point of view, so it shouldn't be surprising the fact that they are considering following the steps of other governments and are currently preparing the ground for a lockdown.
The Swedish government expects a 4 percent contraction of its Gross Domestic Product this year, though it hopes economic growth to recover in 2021 as they foresee a 3.5 percent rebound. Others are not as optimistic, foreseeing an 8 percent fall in the GDP.
"That’s about as much as during the financial crisis, "told the Finance Minister Magdalena Andersson to the media last week, "We have a very serious economic situation," she continued.
Besides this, the government also expects a significant increase in unemployment levels.
"More people will become unemployed and that is also something we assess in these forecasts," she added.
Like other first world countries, the Swedish government also has taken fiscal measures to face the negative effects of the outbreak on the economy, announcing subsidies to cover salaries, loan guarantees, tax rebates among other measures.
As for the dollar, it was undoubtedly the favorite currency of traders last week. The US dollar index, which measures the dollar's performance against a currency basket, advanced 2.27 percent last week, and it seems that the trend is going to continue given the growing bearish behavior and the increasing risk aversion in the world markets.