COPENHAGEN, Jan 3 (Reuters) - Denmark’s central bank will remain on high alert in 2017 to defend its safe-haven currency, which is expected to face more upward pressure from booming U.S. investments and political risks in Europe, the country’s biggest bank said on Tuesday.
The Danish crown, considered a hedge against political uncertainty in the euro zone by many investors, reached its strongest level against the euro since 2012 in December.
A large share of Danish pension savings are invested in U.S. stocks, so the recent rally there has resulted in “substantial wealth gains for Danish savers” and further strengthened the foundation under the crown, Danske Bank A/S said in a 2017 outlook note.
Upcoming elections in The Netherlands, France, Germany and potentially also Italy, and the negotiations about Britain’s exit from the European Union, could also strengthen the crown further.
“We could see additional DKK (crown) buying if EU and euro opposition gains further ground this year,” Danske said.
A strengthening of the crown would in turn lead the central bank to intervene by selling crowns for foreign currency.
Under Europe’s Exchange Rate Mechanism (ERM2), a surrogate for euro adoption, the crown is pegged within plus or minus 2.25 percent of a central rate of 7.46038 per euro.
In practice, Denmark’s central bank has held it in a much tighter range of 0.50 percent either way, via periodic currency interventions and, more rarely, changing the certificate of deposit rate.
Danske said it expected the key rate to remain at the current -0.65 percent throughout 2017.
The central bank will disclose its foreign exchange reserves as of the end of December at 1500 GMT on Tuesday. (Editing by Jacob Gronholt-Pedersen, editing by Larry King)