Denmark ready to tighten grip on euro peg

By Francisco Miñana

Date: Monday 18 Jun 2012

Nordic currencies have been rising strongly versus the euro in recent months as investors look for a refuge from the European financial crisis; the Danish krone has been feeling the most pressure as investors are expecting the currency's peg to the euro to break down.

In statements picked up by The Financial Times, Denmark's central bank Governor Nils Bernstein explained that the bullish pressure on the Danish krone is the strongest he has seen in the seven years in his position. He warned that negative interest rates are possible if the problem continues.

"You can see from our history that we like to keep the krone within a narrow band, half a percentage point or less," said Bernstein. "I think we have to tools to continue to do that, and if it is necessary to move into negative interest rate territory we will be ready for that."

The Danish central bank has cut it interest rate twice to the current 0.45% in order to defend its currency peg band. Sources suggest that several hedge funds have been speculating with long krone positions as a hedge from a potential collapse of the euro.

Denmark's situation is similar to Switzerland, which has had to intervene in the currency market in order to prevent the franc from appreciating. Denmark has had to defend its currency more than in any other moment since 2010 and doubled its reserves from 200bn to 500bn krone.

FM

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