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Will Denmark be the next country to cause currency chaos?

In the aftermath of the market panic triggered by the Swiss National Bank’s shock decision to scrap its euro ceiling for the franc, investors are asking whether Denmark could do the same.

Denmark is the last major economy to peg its currency – the krone – to the euro, and has conducted a fixed exchange rate policy since the 1930s.
Investors thought there was next to no chance that the Swiss central bank would remove its de facto peg on the franc. They do not want to be burned a second time if Denmark’s National Bank (DNB) takes similar steps.

“The Danish currency framework is much longer standing than the Swiss and the DNB has not had the reserve accumulation that the SNB had,” said Tina Mortensen, an analyst at Citi.

In contrast, the SNB’s cap on the franc was implemented far more recently – at the height of 2011’s eurozone crisis as investors piled into safe Swiss assets and gold. Since 1982, the DNB has maintained a tightly governed peg, which has received political support.
This does not mean that the SNB’s actions won’t have an impact. The DNB peg may not disappear this week. But the debate about its role in Danish monetary policy, which has become a dull issue domestically, could be enlivened.

So what will the Danes do?
A more likely step would be for the central bank to cuts its interest rate further below zero, after taking its key policy rate into negative territory in September.
Nordic central banks have been forced to move their interest rates lower in tandem with the ECB, a step that may have unintended consequences – potentially distorting the incentives faced by borrowers and lenders alike.
Supporters of the policy hope that negative rates will support economies and stimulate inflation, before monetary policy makers have to turn to more unconventional tools.

Source The Telegraph

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