IMF Declares Currency Speculators Losers in Danish Peg Fight

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Three months after Denmark became the target of a speculative attack against its currency regime, the International Monetary Fund says the country’s central bank has gained credibility after forcefully fighting back the onslaught.

Policy makers “did a good job of making it clear that the peg would stand and making it clear that it would be unprofitable to speculate against it,” Thomas Dorsey, the IMF’s mission chief to Denmark, said in an interview. “Having for a generation-plus maintained the peg against pressure in both directions, they gain credibility each time and they did it again this time around.”

It’s a rare example of monetary authorities prevailing against the market. Conjecture that Denmark’s euro peg might break spread after Switzerland abandoned its ties to the single currency on Jan. 15. In the ensuing weeks, Denmark cut its main deposit rate to minus 0.75 percent and raised currency reserves by $40 billion to about 40 percent of gross domestic product to deter investors from hoarding kroner.

“It’s impressive how quickly the pressure abated,” Dorsey said. “It seemed to turn off like a light switch, just like it turned on.”

The krone traded at 7.4608 against the euro as of 8:49 a.m. in Copenhagen, compared with the central bank’s target of 7.46038. It traded as strong as 7.4327 on Jan. 15.

Denmark’s currency regime can also withstand structural pressures coming from the country’s bulging current account surplus and a pension industry with a growing need to cover its liabilities, according to the IMF.

Current Account

The current account surplus, which reached 6.3 percent of GDP last year, is “reasonable” given the “current circumstances,” Dorsey said. “We don’t see anything unusual going on in the economy that would justify a change in the exchange rate assessment, though we would like to see a departure from the past, with growth picking up.”

The IMF estimates that the current account surplus will shrink relative to the economy, and account for just 4.5 percent of Danish GDP in 2020 as output grows.

In the meantime, there are “plenty” of “market incentives” to prevent the sort of recurrent pressure on the peg that we saw in January and February,’’ Dorsey said.

Denmark’s $420 billion pension industry “presumably” is “making financial decisions based on what they see as in the best interest of their beneficiaries and owners,” he said. “That’s just the environment in which the monetary policy has to operate.”

ECB, Greece

But some of the Nordic region’s biggest banks continue to caution against assuming pressure on Denmark’s peg has completely died away. The krone’s recent weakness is due in part to record-high dividend payments, according to Nordea Bank AB, Scandinavia’s biggest bank, SEB AB, the region’s biggest currency-trading bank, and Danske Bank A/S, Denmark’s largest lender.

The banks warn that the krone may continue to appreciate as the European Central Bank proceeds with its bond-purchase program and as long as a Greek exit from the euro zone remains a risk.

Yet preventing a currency from strengthening is an easier task than fending off depreciation, according to the IMF. Central bank Governor Lars Rohde has said there is no limit to how much krone he will print to defend the peg.

“This commitment they have shown has reconfirmed with the markets that the peg is a priority and that they’re going to do whatever it takes to maintain it,” Dorsey said.

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