Soaring currency worries force Denmark to act

Investors fleeing troubled euro zone countries are rushing into Denmark, driving the krone to its highest level in nine years, writes NAOMI POWELLin Stockholm

AS IRELAND gradually returns to debt markets for the first time since its bailout and the European Central Bank cuts rates to stimulate growth, Denmark is resorting to radical moves to ground its soaring currency.

Denmark’s Nationalbank cut deposit rates into negative territory recently, an extraordinary move by the Scandinavian country which sees institutions forced to pay to deposit money with the central bank.

“It is an unusual case, but we are living in a world where the places you can store your money safely are a declining asset,” says Kasper Kirkegaard, senior currency strategist at Danske Bank in Copenhagen, “so there’s an increased demand for this. That shows up in the price.”

For the first time in its history, Denmark’s central bank cut the rate offered on certificates of deposit – the amount it charges banks to park money with the Nationalbank – below zero to minus 0.2 per cent. It also slashed its key lending rate to 0.2 per cent.

The moves, made in concert with cuts by the European Central Bank, highlight the stark contrast in challenges faced by European Union members as the economic crisis carries on.

Investors fleeing troubled euro zone countries are rushing into Denmark, driving the krone to its strongest level in nine years in March and putting pressure on the Danish central bank.

Like all Scandinavian countries, Denmark boasts strong public finances and a stable economy, but its policy of pegging the krone to the euro has made it particularly attractive in recent months.

Although Denmark voted against euro zone membership in 2000, its central bank policy is to keep the krone within 2.25 per cent of a central parity of 7.46038 to the euro. In practice, it has held the currency to an even tighter range.

This strict mandate makes the Danish krone an attractive, low volatility choice, analysts say. Should the euro zone disintegrate and the peg break, many believe the Danish currency will soar, resulting in big gains for investors.

“It’s a limited bet on a break- up,” says Niels Christensen, chief currency strategist at Nordea in Copenhagen. “The hedge against one or more countries leaving the euro zone is increasing capital flows into Denmark.”

While Switzerland remains the better-known safe haven, investors have been increasingly drawn to the “Scandis”. In Sweden, more than 60 per cent of government bonds are now held by foreign investors, up from 40 per cent in 2008, while in Norway, almost 70 per cent of bonds are now foreign-owned, up from 50 per cent over the same period.