The head of Denmark’s central bank has warned that the Danish krone is coming under intense pressure from investors seeking a haven in Europe and betting that the currency’s peg to the euro could be cracked by the crisis.
Nils Bernstein, the governor of the Danish central bank, said that the upward pressure on the krone was the most severe he had seen in his seven years as governor, and warned that negative interest rates could be on the cards 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 governor Nils 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.”
Investors are pouring money into Danish bonds attracted by the country’s narrow budget deficit and current account surplus, leaving it fighting to maintain the very narrow peg with the euro it has held since 1999. Rates were cut twice in the past month to a record low of 0.45 per cent.
Making life harder for the central bank, some hedge funds are taking long positions in the Danish krone as insurance against a collapse of the single currency, according to currency trading desks at investment banks.
“Just because a peg has been in place a long time doesn’t mean it cannot break. It just means that it’s cheaper,” said Stuart Fiertz, president of Cheyne Capital, a London-based hedge fund. “If the euro cracks, the pressure to cut the peg will be overwhelming.”
Denmark is in a similar predicament to Switzerland, which has been spending tens of billions of Swiss francs to buy euros and defend its own floor against the single currency after a resurgence in eurozone turmoil led to a spike in demand.
The krone is seen by some investors as a less risky bet than the franc because the Danish central bank has set a peg against a krone, rather than simply a floor, and so there is little danger of it weakening in the event of a recovery in the eurozone.
The Danish central bank spent more defending the krone last month than any time since the start of 2010 and it has seen reserves more than double from about Dkr200 billion ($34 billion) in 2008 to Dkr500 billion today.
The currency market in Danish krone is still relatively small, accounting for just 0.6 per cent of average daily turnover. That compares with 6.4 per cent turnover for the Swiss franc and 39 per cent for the euro.
Other potential currency havens in Europe have been struggling amid the escalation in the eurozone crisis. The pound has fallen in value in recent weeks as investors have priced in the possibility of further monetary easing in the UK.