Denmark Rules Out Speculation as Reason for Krone’s March Dip

(Bloomberg) --

Denmark's central bank has ruled out speculation as the cause of a weakening in the currency when the Covid-19 pandemic hit.

“The pressure on the krone in March this year was unusual because it was not impacted by, for example, speculation about the Danish fixed exchange rate policy,” the central bank said in a review that looked back 12 years.

Rather, it was largely the result of Danish institutional investors selling kroner, the central bank said. After the value of their foreign assets dropped, investors chose to reduce currency hedges. A drop in dollar hedging alone triggered krone sales of 61 billion kroner ($9 billion), the review found.

Denmark pegs its currency to the euro, and its commitment to the monetary policy periodically gets tested. In 2015, the central bank pushed through four rate cuts in quick succession after a decision by Switzerland's central bank to drop its Franc cap triggered an assault on the krone and speculation that Denmark might scrap its decades-old currency peg.

Back in March, the central bank was forced again to resume extraordinary measures, conducting its biggest currency interventions in more than a decade to counter the krone's weakening.

Read more: Surprise Danish Rate Hike Followed Sudden FX Hedging Moves

“This is a major difference from previous episodes of pressure on the krone,” the report concluded. “Previous episodes of pressure have been affected by market speculation about whether the fixed exchange rate policy could be maintained, or whether the euro area would break up.”

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