Icelandic krona in biggest drop since 2009, denting long rally

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The Icelandic krona is on track for its biggest one-day drop since the financial crisis, chipping away at a long rally after the government announced the country would finally return to international financial markets with the lifting of capital controls tomorrow.

The krona was the best-performing currency of any developed nation against the dollar over the last 12 months, strengthening more than 16 per cent in the year to last Friday.

However, it dropped as much as 3.6 per cent on Monday, and at publication time was down 2.6 per cent to 110.4 krona per dollar, its biggest one-day slide since 2009.

Iceland enforced capital controls that year in an attempt to stabilise the currency after the collapse of its three largest banks.

It is hoped that the lifting of controls will help to alleviate pressure on the krona by allowing domestic funds to invest abroad and allowing investors to diversify their assets. The strong currency has created headaches for the country’s central bank, with cheaper imports keeping inflation lower than the Bank of Iceland’s target.

Benedikt Johannesson, Iceland’s finance minister, told the Financial Times yesterday that a group of experts will report later this year on whether Iceland will need to take further steps to stabilise the currency such as pegging it against the euro.

Read more from the FT’s Nordic correspondent Richard Milne here.