Danish monetary authorities lowered interest rates further into negative territory on Monday, seeking to reduce upward pressure on the krone just days before the European Central Bank (ECB) meets this week.
Last week, Switzerland delivered a shock to the market, announcing that it would end its policy of seeking to hold down the value of the Swiss franc against the euro.
Both the Swiss and Danish authorities, trying to keep their currencies — and exports — globally competitive, acted pre-emptively before a meeting of the ECB tomorrow in Frankfurt, Germany.
A weakening euro has the effect of making other European currencies, like the Swiss franc and Danish krone, relatively stronger — which effectively raises the prices of products priced in francs or kroner on the global market.
To reduce demand for kroner and make the currency less valuable, Danmarks Nationalbank, the country’s central bank, said it was cutting the rate on certificates of deposit to minus-0.2 percent from minus-0.05 percent. That will discourage banks from parking excess funds at the central bank.
It is also cutting its lending rate to 0.05 percent from 0.2 percent.
“They’re trying to stem capital inflows by making kroner investments less attractive,” said Carl Hammer, chief currency strategist at SEB in Stockholm.
Normally, the Danish monetary authorities move only after the ECB takes action, he said, typically a few hours later.
“This is unusual,” Hammer added. “It shows nervousness over the new liquidity the European Central Bank will be creating and where that will go.”
News of the Danish central bank move sent the krone down to 7.434 to the euro from 7.430 earlier on Monday, its strongest level since the 2012 sovereign debt crisis.
The Danish central bank has long sought to peg the krone at 7.46038 to the euro, allowing it to trade in a 2.25 percent band to either side of that figure.
Because the ECB supports the peg and could intervene in the currency market if called upon, many economists say a clear distinction should be drawn between Denmark’s currency policy and that of Switzerland, a non-EU member.
Switzerland last week ended a program of trying to protect the franc by buying euros in large quantities, deciding that the euro had grown too weak for the policy to remain effective. The abrupt change caused the franc’s value to soar.
Monday’s move by the Danish central bank, simply adjusting interest rates, was a much less drastic action.
Danish central bank spokesman Karsten Biltoft brushed off any suggestion that Denmark’s peg to the euro was endangered, saying the governors had acted because the krone had become too strong.
“The question has come up in light of the Swiss move, but there’s no comparison between that case and the Danish case,” he said.
He added that Denmark had been pegging the currency to its European neighbors since 1982, when it adopted a link to the old German mark.
“It’s a paperless marriage with the euro,” he said.
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