Speculation with currencies: is denmark the next switzerland?

After the franc’s decoupling from the euro, the krone is coming under pressure. Denmark, however, does not want to be fooled that easily.

They are not directly involved in the currency, but they belong to the Danish crown: Crown Princess Mary and Crown Prince Frederic. Picture: reuters

Following the liberalization of the exchange rate for the Swiss franc, the Danish krone is now increasingly becoming the target of speculators. This is because Denmark has what Switzerland has just abandoned: a fixed exchange rate peg of the Danish krone to the euro. As a result, in view of the euro crisis, investors in search of a supposed "safe haven" have now discovered the Danish krone. This has triggered a massive influx of currency. The central bank is finding it increasingly difficult to prevent the krone from appreciating too much.

On Monday, the Danish central bank had therefore already lowered the key interest rate by 0.15 percent to a record-low 0.05 percent. It is now at the same level as the euro zone. The key interest rate for deposits was changed just as sharply to minus 0.20 percent – meaning that banks have to pay penalty interest when they park money at the central bank. Unchanged high pressure on the exchange rate – the highest since 2012 – indicates that this has not stopped the inflow of capital. If the krone rises, it will mean trouble for Denmark’s export industry as well as for domestic tourism. Experts therefore expect further defensive measures this week.

It’s no wonder that speculation against the krone is picking up, says Jan Størup Nielsen, chief analyst at Nordea Bank: If one country pursues the same exchange rate policy against the euro that another has just had to abandon, the market "naturally wants to test that."

But he doesn’t think Denmark will follow the Swiss example and abandon its exchange rate target. "Danish monetary policy is quite different from Switzerland’s," also points out Klaus Dalsgaard of financial services provider Nykredit: "There, the exchange rate target had only existed for three years, was by definition a temporary measure, whereas in Denmark it is a fixed part of economic policy."

As early as 1982, the Danish krone was pegged to the D-Mark exchange rate. Since the introduction of the euro, the rate has been 7.46 kroner to one euro, with a maximum upward and downward deviation of 2.25 percent. The central bank is currently coordinating its monetary policy closely with the European Central Bank (ECB). With the help of the ECB, it will be possible to defend the fixed rate against the euro and ward off international speculation. Denmark’s central bankers are – still – convinced of this.