http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency What do Zero Interest Rates Do to a Currency? What happens to a currency when a central bank drops interest rates to zero percent? Watch what is happening in Sweden and learn. According to an article in Reuters the Swedish crown is falling as the Riksbank cut rates to zero. The Swedish crown hit a four-year low against the dollar and a four-month trough against the euro on Tuesday after Sweden’s central bank surprised investors by cutting interest rates to a record low of zero percent. Most analysts had forecast the Riksbank would lower its main interest rate, the repo rate, to 0.1 percent from 0.25 percent to fight a risk of deflation, and the central bank went a step further by forecasting a lower rate path for the future. Riksbank chief Stefan Ingves said the central bank is ready to take unconventional measures that analysts said could include asset purchases, intervening in the currency market to sell crowns or imposing a cap like the Swiss National Bank. Switzerland has capped the euro/Swiss franc pair to keep its currency weak and bolster inflation. So, the Swedes want inflation and that is why they, have dropped rates to zero. Swedish Economy and Interest Rates According to Euronews, Sweden surprises analysts by cutting borrowing costs to zero. In a surprise move, Sweden’s central bank has cut interest rates to zero. The bank said that was to counter the risk of prolonged deflation and it does not plan to raise rates until at least the middle of 2016. As in the eurozone, prices have been falling in Sweden encouraging consumers to delay purchases, which weakens economic growth. The bank did say “the Swedish economy is relatively strong and economic activity is continuing to improve”. It expects an expansion of 1.9 percent this year, against 1.7 percent previously, and 2.7 percent in 2015, versus a previous forecast of 3.0 percent. It has cut rates steadily from a peak of 2.0 percent at the end of 2011 as the weak eurozone economy hit Sweden’s key export sector. The issue with Sweden is not so much a weakening of the economy but the risk of deflation such as Japan experienced for two decades after its economic meltdown at the end of the roaring 80s. Now the question is if we will see a Swedish crown carry trade, such as happened in Japan. The Risk of a Carry Trade for Weak Currencies A risk of setting interest rates to zero is that people in your country borrow money at zero interest and then convert it to another currency with higher interest rates. This is called the carry trade. It may work and it can be dangerous. An article in the Financial Times says that a Surging US Dollar threatens emerging market carry trades.

1. By www.TheForexNittyGritty.com
WHAT DO ZERO INTEREST RATES DO TO A
CURRENCY?

2. What happens to a currency when a
central bank drops interest rates to
zero percent?
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

3. Watch what is happening in Sweden
and learn.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

4. Before We Continue…
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http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

5. According to an article in Reuters the
Swedish crown is falling as the
Riksbank cut rates to zero.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

6. The Swedish crown hit a four-year low
against the dollar and a four-month
trough against the euro on Tuesday
after Sweden’s central bank surprised
investors by cutting interest rates to a
record low of zero percent.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

7. Most analysts had forecast the
Riksbank would lower its main interest
rate, the repo rate, to 0.1 percent from
0.25 percent to fight a risk of deflation,
and the central bank went a step
further by forecasting a lower rate
path for the future.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

8. Riksbank chief Stefan Ingves said the
central bank is ready to take
unconventional measures that
analysts said could include asset
purchases, intervening in the currency
market to sell crowns or imposing a
cap like the Swiss National Bank.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

9. Switzerland has capped the
euro/Swiss franc pair to keep its
currency weak and bolster inflation.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

10. So, the Swedes want inflation and
that is why they, have dropped rates
to zero.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

11. Swedish Economy and Interest
Rates
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

12. According to Euronews, Sweden
surprises analysts by cutting
borrowing costs to zero.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

13. In a surprise move, Sweden’s central
bank has cut interest rates to zero.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

14. The bank said that was to counter the
risk of prolonged deflation and it does
not plan to raise rates until at least the
middle of 2016.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

15. As in the eurozone, prices have been
falling in Sweden encouraging
consumers to delay purchases, which
weakens economic growth.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

16. The bank did say “the Swedish
economy is relatively strong and
economic activity is continuing to
improve”.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

17. It expects an expansion of 1.9 percent
this year, against 1.7 percent
previously, and 2.7 percent in 2015,
versus a previous forecast of 3.0
percent.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

18. It has cut rates steadily from a peak of
2.0 percent at the end of 2011 as the
weak eurozone economy hit
Sweden’s key export sector.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

19. The issue with Sweden is not so
much a weakening of the economy
but the risk of deflation such as Japan
experienced for two decades after its
economic meltdown at the end of the
roaring 80s.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

20. Now the question is if we will see a
Swedish crown carry trade, such as
happened in Japan.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

21. The Risk of a Carry Trade for Weak
Currencies
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

22. A risk of setting interest rates to zero
is that people in your country borrow
money at zero interest and then
convert it to another currency with
higher interest rates.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

23. This is called the carry trade. It may
work and it can be dangerous.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

24. An article in the Financial Times says
that a Surging US Dollar threatens
emerging market carry trades.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

25. The term “carry trade” sounds
innocuous, even benign.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

26. But as the US dollar continues to
surge, the multitrillion dollar flow that
has engorged emerging markets
(EMs) risks reversing, threatening
growth in much of the developing
world, analysts warn.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

27. When you finish reading here visit the
Financial Times site and study the
article.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency

28. The point that they make is that the
flow of money out of countries with
zero interest rates or near zero rates
will in the end worsen the conditions
that cause people to move their
money in the first place.
http://www.theforexnittygritty.com/forex/what-do-zero-interest-rates-do-to-a-currency