Danish crown hits 6-year low, markets on intervention-watch?

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Danish crown at multi-year low against euro

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Central bank may intervene to maintain currency peg

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Analysts dismiss US Greenland threats as cause of weakness

By Samuel Indyk and Alun John

LONDON, Jan 9 (Reuters) - The Danish crown fell to its weakest in nearly six years against the euro on Friday, with traders bracing for the country's central bank to stage a rare direct market intervention to maintain its peg ?to the common currency. Denmark is in the spotlight, given U.S. President Donald Trump's threats to seize the Danish territory of Greenland.

But analysts say the drop in ?the crown, which hit its weakest since the COVID crisis in March 2020 at 7.4729 per euro , has ?more to do with Danish money-market interest rates diverging from those of the euro ?zone.

Denmark's currency is pegged to ?the euro at a central rate of 7.46038 crowns and is allowed to fluctuate by 2.25% either side of that level, or to 7.6282 crowns ?per euro at its weakest.

In reality, the central bank keeps the ?currency much closer to the centre point by adjusting interest rates and, more rarely, by directly intervening in the market.

"In late 2019 and early 2020, when the euro/crown traded above 7.47, we ?know the central bank intervened in the FX market," said ?Jan St?rup Nielsen, ?chief analyst at Nordea.

"There is a good chance they have already intervened, or are at least very close to doing so."

A spokesperson for the Danish central bank declined to comment. The central bank had not ?intervened in FX markets since early 2023, according to the most recent data for December released on Monday, marking a 35-month-long hiatus, the longest since the euro was introduced in 1999.

RATE DIVERGENCE

Analysts say a divergence between money-market rates in Denmark and the euro zone is driving the crown lower.

Denmark maintains a policy rate 40 basis points below that of the European Central Bank. But Jens N?rvig Pedersen, Danske Bank's director of FX and rates strategy, said euro ?money market rates have ?been rising as the European Central Bank shrinks its balance sheet, while Denmark's have not.

That creates an incentive for carry trades - which borrow in a low-yielding currency to invest in a higher-yielding one - that ?favour the euro.

"Given that it's tightly pegged, even (rates) diverging by as little as five basis points ... is enough to move the needle on the spot exchange rate," Pedersen said, adding that the crown also often weakens in January due to outbound investment flows.

Analysts said Trump's aspiration to acquire Greenland, potentially by military means, was not a central factor.

"We have seen this process of a weaker (crown) for a long period. So it's not suddenly starting to happen," Nordea's Nielsen said, noting that the chief of the central bank ?said last year that it could be beneficial for Denmark to join the euro given geopolitical uncertainty.

"It will be interesting to see if that theme will pop up again," he said.

Public support for joining the euro zone remains low, with only 33% of Danes in favour, surveys indicate.?

(Reporting by ?Samuel Indyk and Alun John in London, additional reporting by Soren Sirich Jeppesen in Copenhagen; Editing by Amanda Cooper and xxxx)