Lars Rohde, the head of the Danish central bank, Nationalbanken, is fighting windmills like Don Quixote these days. Only his foes are not imaginary – they are international investors gambling on the Danish krone.
The speculation is threatening a currency connection that has existed for three decades, first to the German deutschmark and now to the euro.
Mr. Rohde wants to maintain the link between the krone and euro under all circumstances.
The central bank in Copenhagen has long sought to peg the krone at just over 7.46 to the euro, with a plus or minus 2.25 percent range of fluctuation.
But last month, after Switzerland freed its franc, the Danish krone appreciated strongly against the euro and dollar. The European Central Bank’s new government bond-buying stimulus makes the krone even more attractive.
The Danish krone is in such high demand that Denmark is having difficulties deterring potential buyers. Steen Bocian, Analyst, Danske Bank
To curb speculation, the Danish Central Bank has lowered interest rates three times in just 11 days.
The first two drops did not yield the desired success. So the central bank took drastic action, deciding on a negative interest rate of 0.5 percent on deposits.
Nordea Bank, northern Europe’s largest lender, has already passed on the negative interest rate – meaning savers get less back than they put in.
With the negative interest rates, Mr. Rohde and his monetary authorities in Copenhagen hope that investments in kroner will become unattractive to investors – and pressure on the krone will let up. So far, it hasn’t worked.
“The Danish krone is in such high demand that Denmark is having difficulties deterring potential buyers,” explained Steen Bocian, an analyst at Danske Bank.
According to estimates by analysts in Copenhagen, the central bank has spent about 100 billion kroner buying foreign currencies since the beginning of the year. It also decided to adjust the issuance of government bonds.
In a statement, the central bank said financial requirements for the coming year were covered by currency reserves and the budgetary surplus from last year. These measures should also stabilize the price of the krone, bank officials said. After the announcement, the return on 10-year government bonds fell about two-thirds to under 0.10 percent.
Despite the measures, markets are still gambling that Denmark could also give up its currency peg to the euro. Experts say that’s not likely.
“The probability of that happening is close to zero,” said Helge J. Pedersen, chief economist at Nordea. “It’s like the fixed-rate policy is written in stone, and one does not want to gamble with the credibility that the national bank has built up.”
Krone trades make up only about 0.8 percent of the global currency market. The Swiss franc accounts for about 5 percent.
Peter Bojsen Jakobsen, an analyst at Sydbank, is also certain that the Danish central bank will keep the krone pegged to the euro. “Even in a historic situation like this, the Danish fixed-rate policy is as certain as the granite foundation under Bornholm,” he wrote in a commentary.
Experts also point to differences between Denmark and Switzerland. For one, the Swiss National Bank never made a secret of the fact that the franc was pegged to the euro only for a limited time. Denmark, on the other hand, has tied its currency to the euro for decades.
On top of that, Danish kroner are much less in demand in the global currency trade compared to the Swiss franc. Krone trades make up only about 0.8 percent of the global currency market. The Swiss franc accounts for about 5 percent.
Politicians in Denmark also stand behind the peg to the euro. Most parties even advocate adopting the euro, though Danish voters have turned that down in two referendums.
Besides Great Britain, Denmark is the only European Union country that negotiated an exemption on introducing the euro.
So Mr. Rohde, the chief of the Danish central bank, will have to keep fighting. Analysts, meanwhile, are not ruling out another interest rate correction.
Helmut Steuer is Handelsblatt’s northern European correspondent. To contact him: [email protected].