By Jemima Kelly
LONDON (Reuters) - Sweden's crown hit a 6-1/2-year low against the euro on Thursday, after the central bank said the chances of another interest rate cut had increased and it was ready to expand its quantitative easing program further.
The Riksbank has already slashed rates to -0.5 percent, and is on track to buy 40 percent of the stock of outstanding government bonds by year end. But inflation remains subdued and the central bank said it would take longer to hit its target than previously expected.
The crown initially rose after the announcement, as traders reacted to interest rates being left unchanged and the central bank's saying it saw the repo rate averaging -0.5 percent in the fourth quarter, slightly above a prior forecast of -0.52 percent.
But it then fell sharply, losing 0.8 percent on the day to trade at 9.8000 crowns per euro <EURNOK=D4>, its weakest since May 2010. Against the dollar, it fell 0.6 percent to hit a 7-1/2-year low <SEK=>.
"The tone of the statement was rather dovish," said ING currency strategist Petr Krpata, in London. "Although no QE extension was announced today, the statement sent a strong hint ... at more."
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The dollar traded close to a three-month high against the yen, underpinned by higher U.S. bond yields and growing expectations that the U.S. Federal Reserve will raise interest rates by the end of the year.
The market is now pricing in a 78 percent chance that the Fed will raise rates at its December meeting, according to CME Group's FedWatch tool, following a series of hawkish comments from Fed policymakers.
Those expectations have driven the dollar to nine-month highs against a basket of currencies <.DXY> this week. Higher 10-year U.S. Treasury yields <US10YT=RR>, which rose to 1.813 percent in Asian trade, their highest since this month's five-month peak of 1.814 percent, have also supported the dollar.
"We're seeing a renewed pick-up in Fed rate hike expectations, which will likely intensify going into the November Fed meeting next week," Credit Agricole's head of G10 currency research, Valentin Marinov, said.
"We will be looking for an explicit indication in the statement that rates will be going higher in December."
Marinov said that the dollar was also being supported by a pick-up in corporate demand for dollar funding into the end of the year.
Against the yen, the greenback rose 0.2 percent to 104.65 <JPY=>, just off its high of 104.875 touched on Tuesday.
Norway's crown rose around half a percent after the central bank left interest rates unchanged and signaled that they would remain at their current levels in the period ahead. Against its Swedish counterpart, it climbed 1.5 percent to a its strongest since June 2015 <NOKSEK=>.
(Editing by Robin Pomeroy)