There is “no limit” to how much Denmark can hoard in foreign currency reserves to defend its euro peg, according to the central bank.
After selling a record 106.3 billion kroner ($16.4 billion) last month, central bank reserves are now equivalent to about 30 percent of the country’s gross domestic product. The level poses no risks and is a reflection of how Denmark’s exchange-rate regime is designed to work, Karsten Biltoft, head of communications at the central bank in Copenhagen, said in a phone interview.
The bank can produce an “unlimited supply of Danish kroner” to weaken the currency, he said. Biltoft declined to say whether steps to date have been coordinated with the European Central Bank, which backs Denmark’s peg.
Since the Swiss jettisoned their franc cap on Jan. 15, Denmark has fought back speculation its euro peg would be next. Taking Switzerland as a benchmark, where reserves rose as high as 80 percent of GDP at their peak, Denmark has a long way to go before it tests the limits of what’s been tried before, according to SEB AB, the Nordic region’s biggest currency trader.
“There should therefore be ample scope to increase interventions if the circumstances require it,” Johan Javeus, chief FX strategist at SEB in Stockholm, said in a note.