The Swedish krona has seen a significant decline in June, nearing its lowest value of the year against the euro.

This decrease not only affects Swedish holidaymakers heading to Europe but also poses a challenge for the Riksbank, Sweden’s central bank, as it prepares for its upcoming interest rate decision.

READ MORE: Why the Swedish krona is expected to strengthen in the year ahead

Several factors driving the decrease

Since mid-June, the krona has weakened by approximately 5 percent against the euro and around 4 percent against the dollar.

On Thursday, the Swedish currency briefly hit its annual low against the euro.

According to Karl Steiner, head of analysis at the SEB bank, this recent decline against the dollar is primarily due to a reduced risk appetite in the market, exacerbated by disappointing reports from major companies such as Tesla and Alphabet.

Additionally, political uncertainty in the US, sparked by President Joe Biden’s announcement that he will not seek re-election, has further influenced market dynamics.

“Everything about the American election has become a little more uncertain. The market doesn’t really know how Kamala Harris stands against Trump, or what her agenda is, and now has to rethink,” Steiner explained, as reported by the news bureau TT.

Why small currencies weakened in June

Steiner noted that the dollar has strengthened against most currencies, typically viewed as a safe haven during market turbulence, while smaller currencies like the Swedish krona tend to weaken under such conditions.

Alexandra Stråberg, chief economist at Länsförsäkringar, attributed the krona’s decline to faster-than-expected inflation reduction in Sweden compared to the eurozone.

“The communication from the various central bank governors has also been different,” she noted.

While the Riksbank has indicated potential interest rate cuts, the European Central Bank (ECB) has refrained from making similar forecasts.

“In the short term, you see that the interest rate in Sweden will be lower than the interest rate in Europe. This, in turn, means a weakening of the krona because it means that you get a lower return if you invest in the krona than in euros,” Stråberg said.

The August interest rate decision

The krona’s continued weakening could pose a more significant issue for the Riksbank’s key interest rate decisions in August.

Inflation remains the primary focus for the Riksbank, but a weakening krona can indirectly influence inflation.

The central bank’s inflation target is two percent.

READ MORE: What could low inflation mean for foreigners in Sweden?

“If the krona continues to weaken, it may be that the Riksbank decides not to make as many interest rate cuts as originally thought,” Stråberg said.

Conversely, Karl Steiner believes the Riksbank will not factor the krona’s weakness into its decision-making process.

“When inflation falls more than expected, you have to act on it in the first place. As the situation is right now, they can only note that the krona is weak and that parts of it have to do with international affairs,” he said.

The key interest rate is the central bank’s main monetary policy tool.

It decides which rates Swedish banks can deposit in and borrow money from the Riksbank, which in turn affects the banks’ own interest rates on savings, loans and mortgages.

If bank interest rates are high, borrowing money becomes more expensive, which means people spend less, and as a result, inflation drops.