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Foreign Exchange

Danish FX reserves hit record high; another source of pressure on EUR

Denmark’s central bank has announced that it foreign currency reserves rose to record levels as it fought to preserve the krone’s peg against the EUR in June.

In a similar position to Switzerland, Denmark has attracted haven flows amid heightened speculation that the eurozone’s debt crisis could spiral out of control should Greece leave the currency area. That could force Denmark to abandon the peg that it operates against the EUR. The bank targets a rate of DKr7.46038 against the single currency and tolerates moves of no more than 2.25 % around that level.

Denmark’s central bank revealed its foreign exchange reserves rose by DKr9.2 billion to an all time high of DKr511.6 billion last month as it sought to maintain its currency regime. That was made up of DKr7.2 billion in foreign exchange purchases and net foreign borrowing of DKr2 billion.

The central bank cut interest rates twice in May to deter investors and warned that negative rates would be imposed if necessary.

Nils Bernstein, central bank governor, said last month that there was no limit on how high foreign exchange reserves could rise in order to maintain the peg.

“In the immediate short run, we believe there is sufficient political willpower to keep Greece in the euro and do not see the EURDKK peg decoupling; but should we see a flight of capital out of Europe then all bets are off and Denmark could be well positioned as the outlier beneficiary,” say analysts at JPMorgan Private Bank.

In the meantime, continued reserve accumulation in Denmark should add to the pressure on the EUR as Copenhagen follows the Swiss National Bank’s lead and diversifies the proceeds of its intervention activity out of EUR and into USD, GBP and other currencies.

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