January 22, 2015 / 11:43 AM / 3 years ago

UPDATE 1-Danish central bank intervenes to weaken crown

(Adds details, quotes)

By Anirban Nag

LONDON, Jan 22 (Reuters) - The Danish central bank intervened in the currency market on Thursday, pushing the crown to its lowest in nearly five months against the euro, as it stepped up its fight to ward off upward pressure on the currency.

Currency flows into Denmark have picked up on speculation 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 cutting interest rates deeper into negative territory on Monday, but the effect of that was fleeting.

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. An intervention often precedes a rate cut in Denmark, and many in the market expect the bank to reduce rates after a European Central Bank policy announcement later on Thursday.

“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 Danish 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 7.4440 crowns, up 0.13 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 immediately after the ECB decision.

Danish monetary policy moves in sync with the ECB and the currency peg with the euro is the cornerstone of economic policy. The Danish central bank lowered the deposit rate by 15 basis points to -0.20 percent on Monday, just days before the ECB is likely to announce a quantitative easing programme.

“Its likely that a rate cut will not happen today. But a lot depends on the reaction that we will see in the euro if the ECB decides to go for a quantitative easing,” said another trader at a large Nordic bank.

Denmark is the sole remaining member of the ERM2 European exchange rate mechanism, in which a number of EU countries once kept their currencies within bands against the euro. 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 the Danish National Bank 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)

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