SEK Strengthens Significantly Amid US Policy Shifts

The Swedish krona (SEK) has achieved historically strong performance since January 2025, with its trade-weighted exchange rate appreciating by 7%, the most significant rise since 1993. This comes as a surprise, as the SEK typically weakens during periods of global uncertainty.

The recent turbulence in financial markets and heightened uncertainty regarding economic conditions and inflation worldwide are attributed to policy actions by the new US administration. These actions have reshaped the global geopolitical and trade landscape.

Contrary to historical trends, the SEK has strengthened by 5% against the Euro and 12% against the US Dollar. Analysts suggest this is due to a reassessment of the US economy, leading to reduced confidence and a lower demand for the USD. This has prompted capital reallocation from USD-denominated securities to other markets.

Interest rate differentials also play a role. While the US Federal Reserve faces complex decisions regarding monetary policy, European nations and Sweden have committed to increased defense spending, potentially raising borrowing requirements. Nordea forecasts a gradual strengthening of the SEK to 10.50 against the EUR by the end of 2026.

A stronger SEK is expected to have a dampening effect on inflation, potentially by nearly one percentage point over time. While this may negatively impact GDP through reduced net exports and tourism, Sweden's strong export sector and sound public finances are seen as supportive of long-term growth prospects.