Denmark’s Central Bank Supports Krone as Haven Demand Fades

Denmark’s central bank purchased kroner to support the currency’s peg to the euro for the fifth month in a row as weaker demand for haven assets and negative policy rates left their mark on the exchange rate.

Nationalbanken purchased net 11.9 billion kroner ($2.17 billion) to strengthen the currency in January, the Copenhagen-based bank said in a statement today. Foreign reserves in total declined by 6.1 billion kroner to 495.6 billion kroner, it said.

The bank, which uses policy to target a krone rate of 7.46038 against the euro, last month raised its key lending rate from a record-low after it deemed defending the currency peg had become too expensive. Last year, the bank fought to weaken its currency in response to a capital influx spurred by investor flight from the euro crisis.

“The interventions and the rate increase have so far eased the pressure on the krone,” Jens Naervig Pedersen, an economist at Danske Bank A/S in Copenhagen, said in a note.

The central bank has now spent a net 17.1 billion kroner of foreign reserves to support the currency over the last five months. In the first six months of 2012, the bank sold a net 36.9 billion kroner in reserves to weaken the krone.

The krone has weakened and Danish bond yields have jumped as Europe’s leaders have persuaded investors in the euro region that the worst of the debt crisis is over.

The central bank last month raised its lending rate to 0.3 percent from 0.2 percent. It also increased its deposit rate to minus 0.1 percent from minus 0.2 percent.

The krone traded little changed at 7.4602 per euro as of 4:10 p.m. local time. The currency traded at 7.4301 on May 25, the strongest level in 2012, according to prices available on the Bloomberg.

“The krone can, however, easily come under renewed pressure if money market rates in the euro zone rise further,” Pedersen at Danske said.

In that case, the central bank will first support the krone so-called interventions of 10 billion kroner to 15 billion kroner, the economist said. If that doesn’t help strengthen the currency, the central bank will raise rates again, he said.

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