Speculators target Swedish krona

Falling share markets have driven capital out of Sweden, weakening the currency

During the past couple of weeks, Sweden's central bank has intervened on the currency markets several times to prop up the krona, but as the BBC's Rodney Smith explains, its prospects for success are uncertain.

The question in currency markets is - will the Swedish central bank panic or not?

Bored with the lingering decline of the euro, the unsustainable strength of the dollar and the constant reluctance of the yen to depreciate, the currency markets have, in the Swedish krona, a new toy to play with.

It is an old fashioned game, dating back to the pre-euro days when baiting European central banks was part and parcel of daily activity.

It's been clear that in forcing limited intervention by the Riksbank to deal with the Krona's weakness, the markets have been testing the bank's resolve.

Urban Bäckström, Riksbank Governor

The Riksbank is caught between a rock and a hard place.

Falling share markets in recent months have driven capital out of Sweden, weakening the currency.

But growth is slowing, making the prospect of raising interest rates unattractive and probably counter-productive. Hence the intervention in the markets.

Inflation risk

Riksbank governor Urban Bäckström is thought likely to maintain his present policy.

There are those who believe he has sufficient foresight to look further down the road to the possibility of higher inflation, driven by the weaker currency.

In such an event, he will probably raise interest rates only modestly at the next monetary policy meeting, on 6 July.

This would not support the currency, but it would send the correct signals about the bank's longer term thinking about inflation, although there could eventually be a growth penalty.

Mr Bäckström recently said that if intervention did not work, there would be a case for increasing interest rates by a notch - that's the word he used.

He's on his own. There will be no international help for Sweden as a non-euro European.

If you're betting on Swedish interest rates, expect an increase of 0.25% at the 6 July monetary policy meeting.

On Friday afternoon, £1 was worth 15.24 Swedish kronor while $1 was worth 10.82 kronor.