Denmark recommits to euro peg

Denmark wouldn't turn its back on the euro, the country's Economy Minister Morten Oestergaard said Tuesday, seeking to calm fears that the tiny Scandinavian kingdom could follow Switzerland's lead and abandon its currency peg against the euro.

The reassurance came a day after the country's central bank surprised markets by cutting its deposit rate further into negative territory, from -0.05 to -0.2 percent. It also lowered its lending rate to a record 0.05 percent from 0.2 percent.

"I know of no serious politician in the Danish parliament arguing for leaving the present Danish currency regime ... The government does not wish to leave," Oestergaard told Danish broadcaster TV2 following the bank's announcement.

On Thursday, the Swiss National Bank (SNB) shocked financial markets by ending its three-year-old policy of pegging its currency to the euro. The decision sent the Swiss franc soaring by almost 30 percent in value against the euro.

Curbing currency speculators

Many analysts had predicted that Switzerland's decision to scrap its currency cap would drive investors to Denmark.

"Denmark has now seriously caught the attention of investors who are looking for countries where interest rates are being pushed down as a consequence of the SNB scrapping its currency cap," chief analyst at Denmark's biggest bank, Danske Bank, told national broadcaster DR on Monday.

By further lowering its rates, the central bank in Copenhagen sought to discourage excessive investment in the Danish krone and stop the currency from strengthening even further. The new deposit rate means that it will now cost investors 20 kroner (2.7 euros, $3.1) to park 100 kroner in the central bank.

Surprise move

While many analysts had predicted a rate cut, most didn't anticipate the Danish central bank would act until after the European Central Bank's (ECB) policy meeting on Thursday.

The ECB is expected to announce a 550-billion euro ($640 billion) bond-buying program, meant to jumpstart the eurozone's flatlining economy and stear the embattled euro away from deflation. The flagging single currency has also dragged down currencies pegged to the euro, which is what prompted Switzerland to sever ties.

Historic low?

However, Denmark says it remains committed to its peg, with some economists expecting further action to stabilize the krone following the ECB's announcement.

"We expect the Danish central bank to cut rates once again on Thursday, by 0.10 percent. That would bring the certificate deposit rate down to a historic low of 0.30 percent. And we can't rule out more rate cuts after that," Rasmussen told DR.

While Denmark is a member of the EU, it's not a member of the eurozone. Still, the krone has been pegged to the euro since 1999, through an agreement known as the European Exchange Rate Mechanism (ERM2), under which the Danish currency can move only 2.25 percent up or down from a fixed rate of 7.46 krone per euro.

pad/uhe (AFP, dpa, Reuters)