A Bad Year for the Icelandic Króna?

The Icelandic króna has continued to weaken against the euro throughout this year, reaching its weakest level last Wednesday when one euro was equivalent to approximately ISK 165, RÚV reports. Today, one euro is equivalent to approximately ISK 160, a rapid strengthening which follows the announcement made on Thursday from the Central Bank of Iceland: that it has decided to launch a regular programme of selling foreign currency in the domestic foreign exchange market.

A statement on the Central Bank’s website explains: “The objectives of the purchase programme are to deepen the market and improve price formation. All else being equal, a larger and more stable supply of currency should lead to greater stability in the market.”

Despite the development of recent days, however, the Icelandic króna has weakened by 17% against the euro since the start of this year, when one euro was equivalent to 137 ISK. Brief fluctuations of strengthening followed by weakening are also common.

In an interview with RÚV, the director of Landsbankinn’s economics department Daníel Svavarsson said that the exchange rate has fluctuated with the epidemic. “The weakening really started in March,” he stated. “There was an obvious COVID effect and it happened when the tourism industry was hit.” The króna then strengthened in May and June “when things started to get better and it looked like the tourism industry would reach good months”, but has weakened gradually since then.

Svavarsson also explained that fluctuations are caused by market psychology and expectations, and that it is therefore likely that the ISK will strengthen when vaccines are distributed.

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