The Diverging Fortunes Of Nordic Currencies. By Nicholas Hastings

The Swedish krona and the Norwegian krone are once again parting ways.

As fallout from the global credit crunch rumbles on, Norway is set to recover, benefiting from the rally in crude oil prices.

However, Swedish banks have found themselves still vulnerable to the vagaries of Baltic economies, especially now that Latvia appears to be edging closer to devaluation.

The two Nordic currencies have been here before.

Earlier his year, the krona was hammered by the krone - which rose all the way over SEK1.3150 - as investors feared a wholesale collapse of the Swedish financial system as Baltic economies teetered on the edge of bankruptcy.

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Help from the International Monetary Fund helped to ease the burden and the krona was gradually able to recover against its Norwegian counterpart. Last month, the Norwegian krone fell all the way back to SEK1.17.

Since then, however, the mood in global financial markets has shifted.

Hopes of a global economic recovery have taken off once again, with this week's hike in Australian interest rates seen by many as the point at which G20 economies start to shrug off the credit crunch.

Norges Bank is already being lined up as the next central bank to exit the weak monetary strategies adopted to get through the financial storm. Some reckon this could come as soon as the bank's next meeting, Oct. 26.

On Wednesday, Norwegian manufacturing output data showing a 0.8% rise in August, following on from a 0.6% increase in July, provided more evidence that Norway's economy is emerging from its recession and able to cope with a tightening in monetary policy.

As an oil producer, the country is also benefiting from the expectation of increased global demand, which has kept crude oil prices on the rise. These higher revenues will ensure that Oslo doesn't face the fiscal pressures that remain a problem for many other western governments.

By contrast, the outlook for Sweden has deteriorated at the same time.

Baltic states may have got their houses in order and Swedish banks may have been able to boost their balance sheets, compared to what they were at the start of the year. But with house prices in Latvia falling 70% and the government considering legal moves to protect householders, the risk of a devaluation in the Latvian lat has increased sharply in the last week or two.

Although the government has denied any devaluation plans, Wednesday's failed bond auction in Riga only underscores the risks.

Swedish banks may be better able to withstand the losses from default on Latvian loans than they would have been previously, even though losses are likely to be heavy. However, a sharp fall in the value of the lat would still curtail their ability to lend and the inevitable tightening in Swedish credit conditions would only put Swedish markets - and the krona - under pressure again.

After sharp losses against the krone Wednesday, the krona is still under slight pressure Thursday, with the Norwegian currency rising to SEK1.2355 by 0645 GMT from SEK1.2310 late Wednesday in New York, according to EBS.

Elsewhere, the dollar was under pressure as strong employment figures from Australia once again boosted hope for a global recovery, with the price of gold rising to a new record high of $1,054.68 an ounce and the Nikkei gaining 0.3%.

Strong earnings data from Alcoa also helped to boost sentiment with the euro rising to $1.4767 from $1.4672, and to Yl30.39 from Y130.05.

The dollar was also down at Y88.30 from Y88.62