The Swedish central bank, Riksbank, announced on Thursday that it will hedge approximately 25% of its currency reserves, a move expected to influence the strategies of large institutional investors. The initiative, which involves selling $8 billion and €2 billion ($2.1 billion) for Swedish kronor over the next four to six months starting Monday, is designed to protect the bank from potential losses should the krona appreciate in value.
Governor Erik Thedeen explained the decision as a response to the belief that the Swedish krona is currently undervalued without substantial reason. This conviction is based on Riksbank's analysis, which suggests the current value of the krona is significantly below its rightful level considering the fundamentals of the Swedish economy. He also stated it is unlikely to have a significant impact on the exchange rate.
Thedeen expressed his anticipation of a swift reversal in the currency's fortunes, stating that such a recovery would negatively impact Riksbank's currency portfolio. Therefore, the bank has adopted a strategy to hedge its reserves. He also suggested that investment boards or pension fund boards might find it reasonable to consider similar hedging strategies due to the current state of the krona.
Thedeen added: "This is not an intervention as interventions are typically undisclosed, non-transparent and limitless. We have a predetermined amount of about a hundred billion Swedish kronor. However, if these transactions result in strengthening the krona, we would be pleased."
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