The Swedish krona dropped to a record low against the euro on Thursday amid increasing concerns over the country's financial sector.

Traders said talk that several large funds had unwound their exposure to Sweden exacerbated the move, while a greater than expected rise in Swedish unemployment also weighed on the currency.

David Deddouche, at Société Générale, said the likely reason for the krona's fall from grace was concern over the exposure of Swedish banks to the Baltic states.

Those worries were highlighted in a policy update last month from Sweden's central bank, which warned that a prolonged slowdown in the Baltic states could lead to higher financing costs for Swedish banks and hence more expensive loans for Swedish households and companies.

Mr Deddouche said price action in the credit markets, where the cost of insuring Baltic government debt has risen sharply in recent days, indicated that investors were increasingly worried about the region's economies.

"As the recession turns global, Baltic states are suffering," he said. "Nobody can say with 100 per cent confidence why investors suddenly unwound the Swedish krona positions, but the worsening conditions in the Baltic countries surely didn't help."

The krona fell to a low of SKr10.1450 against the euro, its weakest level since the single currency's introduction in 1999, before rallying to stand 1.3 per cent higher at SKr9.9835 by midday in New York.

Meanwhile, the yen gave back some of its recent gains, falling 0.6 per cent to Y100.31 against the dollar.

The yen, which rallied sharply on Wednesday as equities tumbled and boosted demand for the haven of the low-yielding Japanese currency, also fell 0.2 per cent to Y134.45 against the euro, 1.1 per cent to Y172.85 against the pound and 1.8 per cent to Y66.40 against the Australian dollar.

The dollar also advanced 0.5 per cent to $1.3398 against the euro, but eased 0.1 per cent to SFr1.1315 against the Swiss franc. Earlier in the session, the Swiss franc slipped to its weakest level of the year, hitting a low of SFr1.1488 against the dollar, after the Swiss government said it would take a near-10 per cent stake in UBS as the bank raised funds to help it survive the ongoing banking turmoil.

Sterling rose 0.5 per cent to $1.7228 against the dollar and 0.9 per cent to £0.7775 against the euro.

Andrew Wilkinson, at Interactive Brokers, said he was at a loss to explain the pound's resurgence in the face of the fact that the UK housing market had ground to a halt, other than to suggest the pound had benefited from the leadership shown by Gordon Brown, UK prime minister, during the banking crisis.