Norwegian crown best defence against war anxiety

The Norwegian crown is the best investment protection against currency turbulence from a possible war in Iraq and will stay strong over the next six months, strategists said in a Reuters survey. Norway is the world's third largest oil exporter and ructions in the Middle East which threaten world oil supplies traditionally push up the crown against the dollar and the euro. The United States imports nearly half its daily oil needs, while Europe has to import most of its needs. In the survey of 39 strategists taken October 7-10, the mid-range forecast put the dollar around 7.35 Norwegian crowns until the end of March 2003 from around 7.55 on Thursday. Against the euro, the crown is forecast at 7.35 by the end of December and around 7.38 by the end of March next next year compared to around 7.36 on Thursday. "As long as oil prices stay reasonably high the crown will gain," said John Normand at JPMorgan in London. "Most people view it as a hedge against Middle East tensions." The Norwegian crown has risen by more than 10 percent against the euro and nearly 15 percent against the dollar since the September 2001 attacks on U.S. cities. War rhetoric against Iraq by U.S. President George Bush has added to the uncertainty and currency strategists put the chances of war between the United States and Iraq within the next six months at 70 percent. SHORT OR LONG However, Norway's central bank governor Svein Gjedrem sparked a crown sell-off against the dollar and euro on October 17 when he warned that low market liquidity was a risk for investors who would find it difficult to reverse deals. The survey of currency strategists gave a mid-range assumption that any Iraq conflict would last a month. The price of Brent crude oil over the period of any conflict was estimated at $32.5 per barrel. Oil analysts in a separate Reuters survey forecast Brent crude oil would average $27.15 per barrel in first quarter 2003. A study by Norway's central bank found oil prices between $14 and $20 per barrel made little difference to crown sentiment, but below $14 was found to be detrimental to the crown. The poll of currency strategists gave a mid-range assumption for any conflict to last six weeks. Eight expected a war to start by end-2002, 27 said January or February, one said first quarter 2003, one said March, one said June and one thought anytime between November and January. In a Reuters survey of 22 defence and Middle East experts, 13 said a U.S. invasion of Iraq with United Nations backing was likely or very likely within the next six months. Most expected the conflict would start in January or February and last no more than three months. "The uncertainty in the run-up to any attacks is encouraging higher oil prices," said Michael Lewis at Deutsche Bank in London. "The assumption is that a war will help to remove some of the uncertainty and help the dollar to a brief rally." Strategists agree the length of any conflict will be a deciding factor behind currency moves over the next six months. A short war could boost dollar sentiment, but problems with financing the U.S. current account deficit will keep a lid on any gains and strategists said Middle East tensions will not end with the war. In contrast the Norwegian crown will stay in demand as long as there is turmoil in the Middle East because of Norway's large current account surplus. Other currencies that stand out on this measure are the Swiss franc and the Japanese yen. "Among the three, the crown is superior because it is an oil exporter," said Stephen Jen at Morgan Stanley in London. PREMIUM FOR HOLDING CROWNS Norway's overnight lending interest rate at nine percent is also a plus for the crown against the euro and dollar. The interest rate differential against the euro is 5.75 percent in favour of the crown and would rise if the European Central Bank cuts its 3.25 percent benchmark refi rate. Against the dollar, the premium for holding crowns is 7.25 percent, with a strong chance of a cut in the 1.75 percent U.S. fed funds rate. "I believe the Norwegian crown is the best safe-haven currency to hold for now," said Jen at Morgan Stanley. "With Europe struggling to cope with the structural fractures that are emerging with low economic growth, Norway, like the UK, has become a sort of economic safe-haven." Weak economic growth has threatened a pact -- designed to protect the euro -- on curbing government budget deficits. Forecasts for the dollar ranged between 6.75 and 8.04 Norwegian crowns by the end of March next year. Euro forecasts ranged between 6.31 and 8.74 crowns.