ANSWER: They are both "safe havens."
Norway’s krone will gain further as investors “desperate” for protection against a deepening European debt crisis turn to one of the few haven markets that isn’t overvalued, said Deutsche Bank AG, the world’s biggest currency trader.
The krone rose more than any other major currency against the franc on Sept. 6, when the Swiss National Bank said it will defend a target of 1.2 against the euro with “utmost determination.” As Swiss efforts to shut the door on franc appreciation force investors to turn elsewhere, the krone will be one of the currencies to fill the vacuum, said Henrik Gullberg, a London-based strategist at Deutsche Bank.
“There is a desperate need for safe havens and the krone is an obvious candidate,” Gullberg said in a phone interview yesterday. “The krone is not significantly overvalued, which is another thing that is attractive.”
Investor's are selling euros (and dollars) and buying Norwegian krona and Swiss francs, which can be thought of as an increase supply of dollars, which reduces its price (measured in francs or krona) in the foreign exchange market.
Footnote: the resulting appreciation has hurt exporters in Switzerland, and induced the Swiss central bank to print money to buy foreign currency. This selling francs to buy dollars has brought down the value of the franc a little, it has also caused the bank to suffer huge losses on its foreign currency holdings (about 5% of Swiss GDP).
When Greece switched to the Euro, products that had been 200 or 300 drachma (loaf of bread) instantly became 1 Euro. I remember being astonished at the price differences during my visit as the exchange for 1 Euro was 340 drachma.
ReplyDeleteAlthough some are proposing a return to the drachma is the only way to manage the debt (Roubini) it's far from an ideal solution. Argentina is loosely referenced as a historical parallel. However, it's important to keep in mind that the rest of South America wasn't directly tied to ARS when Argentina adjusted the valuation of their currency.