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By Anirban Nag
LONDON, Jan 22 (Reuters) - The Danish central bank stepped up its intervention to weaken the crown on Thursday, driving the currency to a five-month low against the euro and cooling market expectations that it would cut interest rates again this week.
Currency flows into Denmark have picked up on speculation that it will abandon the crown’s peg to the euro, after the Swiss National Bank removed its cap on the franc last week.
The Danish central bank surprised investors by pushing interest rates deeper into negative territory on Monday to discourage inflows, although the impact was fleeting.
“The weakening of the crown will somewhat lessen the need to cut rates today,” said Niels Christensen, FX strategist at Nordea, Copenhagen. “A lot, though, depends on the reaction in the euro if the ECB decides to go for a quantitative easing.”
The Danish central bank has been intervening this week, after buying 6.9 billion crowns ($1.1 billion) in the market between September and November 2014.
Interventions often precede rate cuts in Denmark, and some in the market still expect the bank to reduce rates after the European Central Bank announces its policy decisions on Thursday. The ECB is expected to begin printing money to buy bonds to support the euro zone, which would most likely weaken the euro against its peers.
“They have been intervening, but today they just started to hike the bids,” said a senior trader at a Nordic Bank. “They started at 7.4345 crowns per euro and pushed it to 7.4430 crowns.”
The central bank declined to comment.
As a result of the intervention, the crown, pegged to the euro, fell as much as 0.25 percent, its biggest one-day percentage drop in a Reuters data series beginning in 1999.
The euro was last trading at 7.4465 crowns, up 0.15 percent on the day, and well above a 2 1/2-year low of 7.43 crowns struck earlier this week.
The weakening of the crown would make it easier for the Danish central bank to hold off from a rate cut.
Danish monetary policy moves in sync with the ECB and the currency peg with the euro is the cornerstone of economic policy. The central bank lowered the deposit rate by 15 basis points to -0.20 percent on Monday.
Denmark is the sole remaining member of the ERM2 European exchange rate mechanism, in which EU countries keep their currencies within bands against the euro, with a view to eventually joining the single currency. Under the Danish peg, the crown can fluctuate by up to 2.25 percent around a central exchange rate of 7.46038.
If the crown appreciates to its upper limit, both Denmark’s Nationalbank and the European Central Bank are obliged to defend the band. So far, that has not been put to test. (Additional reporting Sabina Zawadzki in Copenhagen; Editing by Larry King/Hugh Lawson)