DJ Forex Focus

The Swedish krona should see better days now.

After weeks of suffering from fears of a Latvian devaluation and then being knocked this week by the Riksbank's surprise decision to cut interest rates, selling pressure will wane.

Not only is the currency looking undervalued relative to the euro but signs of economic resilience in Sweden mean that the Riksbank will avoid further rate cuts. The central bank also won't have to pursue the quantitative easing that it threatened if the economy got "much" worse than expected.

At one stage earlier this month, the euro rallied well over SEK11.00.

Now, forecasters are looking for the single currency to back down to at least SEK10.60, especially if global market sentiment remains as benign as it has in recent months.

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Optimism over the krona's prospects has increased as a series of bailout packages from the European Union and the International Monetary Fund brought some stability to the Latvian economy.

An expected economic contraction of 20% this year had initially threatened to pop the lat's peg to the euro and force a devaluation - leaving heavily exposed Swedish banks in the lurch.

Earlier this week Latvian central bank governor Ilmars Rimsevics pledged once again to stick to the peg. Even so, he still forecast that an economic recovery could emerge next year. This helped to reassure currency players that the risks to Sweden, the krona and the Baltic states in general are now receding.

News Thursday that the Riksbank had decided to cut rates by 25 basis points to 0.25%, against market expectations, was a small hiccup in the krona's recovery.

The cut came with a dovish downgrade in inflation and growth forecasts for this year as well as a warning that the repo rate will remain down at this low level until the autumn of 2010.

However, the surprise cut is now seen giving an additional stimulus to an economy that is already showing signs of rebounding from recession. Previous rate cuts have helped to boost retail sales and the latest purchasing managers' index for manufacturing has risen back over the 50 level that denotes economic expansion.

This not only means that there is a good chance that the Riksbank will be able to leave rates at 0.25%, and not cut them any lower, but that quantitative easing, which has been pursued by many other central banks, won't have to be adopted.

Instead, the central bank increased its one-year lending to Swedish banks at a fixed rate in what Calyon Credit Agricole described as a "very ECB-esque" attempt to boost credit. Like those in the euro zone, most Swedish firms get most of their lending from banks rather than from the market, as they often do in the U.S. and the U.K.

Early Friday in Europe, the euro was down at SEK10.8902 by 0645 GMT from SEK10.8995 late Thursday in New York. Elsewhere, the euro was mixed as risk appetite, which had fallen Thursday after U.S. payrolls came in lower than forecast, showed signs of recovery.

The single currency was down a little at $1.4015 from $1.4025 but it rose to Y134.60 from Y133.45. The dollar was up at Y96.03 from Y95.85 as equity markets showed a little resilience after the heavy 2.6% loss posted by the Dow Jones Industrial Average. In Japan, the Nikkei ended the day only 0.6% lower.