The Norwegian krone has been on a long-run weak trend since the sharp drop in oil prices in 2014. From the late 1980s to 2014, the NOK/EUR exchange rate tended to converge at NOK 8 per EUR. Currently the exchange rate is 50% higher, approaching 12 NOK per EUR. Lately, despite a high oil price, the krone has remained weak, indicating that there are other drivers behind the NOK’s weakness. Early COVID-19 uncertainty caused the krone’s value to tumble, as investors turned to safe-haven currencies like the dollar. Then the steep global hiking cycle, necessitated by rising inflation after the pandemic, compressed Norges Bank’s policy rate differential with its trading partners, weakening the NOK further. When the Fed cut its policy rate in September, the NOK slightly appreciated, but it is now depreciating again. Additionally, a decline in Norway’s oil exports relative to total exports, and a shift from oil to renewable energy, are pulling the value of the NOK down. Another impact of oil revenue on the value of the NOK is Norges Bank converting tax revenues from oil companies to USD for Norway’s sovereign wealth fund, which is invested abroad. All else equal, this causes a depreciation of the NOK. A weak NOK decreases the likelihood of an interest rate cut in Norway this year, particularly because this causes imported inflation.
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