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Denmark Says It Has Tools to Defend Euro Peg After Surprise Cut

Denmark sought to quash speculation it may follow Switzerland and abandon its euro peg, delivering a surprise interest-rate cut to prevent the krone gaining further.

“We have the necessary tools to defend the peg,”Karsten Biltoft, head of communications at the central bank in Copenhagen, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.”

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Since the Swiss National Bank shocked markets on Jan. 15 by jettisoning its three-year-old euro peg, Scandinavia’s biggest banks have fielded calls from hedge funds and other offshore investors asking whether Denmark could be next. Danske Bank A/S (DANSKE) has sought to dispel the speculation, noting Denmark’s three-decades-old currency regime is backed by the European Central Bank , unlike the SNB’s former system.

“The comparison that is made between Denmark and Switzerland I think is somewhat off,” Biltoft said. “I don’t think you can make a comparison between the two cases.”

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The Danish central bank today cut its deposit rate to minus 0.2 percent from minus 0.05 percent and lowered its lending rate to 0.05 percent from 0.2 percent. While the bank can adjust rates at any time, it traditionally announces changes on Thursdays, mostly in connection with ECB moves.

Today’s rate cuts “underline the fact that the inflow has been pretty massive since they decided to move on a Monday,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske in Copenhagen. “We should price in a probability of a new cut on Thursday, especially if the FX intervention continues.”

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The krone was little changed at 7.4345 per euro as of 4:19 p.m. in Copenhagen. The Swiss franc surged last week while Denmark’s krone rose to its strongest since July 2012. Besides abandoning the euro peg, the SNB also cut its main rate to minus 0.75 percent from minus 0.25 percent.

Governor Lars Rohde said late last year that Danish rates were under pressure as the ECB prepares to start its program of quantitative easing. His job is to target 7.46038 kroner per euro. While the bank’s official tolerance band is 2.25 percent, in practice it has stayed within about 1 percent of the target.

ECB policy makers will this week meet to discuss the purchase of government bonds. The Danish cut means depositors will have to pay more to park their cash at the central bank. AAA-rated Denmark first tested negative rates in July 2012 to fight back a capital influx during Europe’s debt crisis.

To contact the reporters on this story: Peter Levring in Copenhagen at [email protected]; Frances Schwartzkopff in Copenhagen at [email protected]

To contact the editors responsible for this story: Jonas Bergman at [email protected]; Tasneem Hanfi Brogger at [email protected] Tasneem Hanfi Brogger

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