The Danish krone bounced back from its 3-day low against the dollar this morning after tumbling by over 0.90 percentage points following a fall in general risk appetite, with equities in the US falling and treasuries rising.
As the Danish krone is pegged to the euro, it moves roughly in line with the single currency and has been taken for a ride on the dollar’s rollercoaster following volatility in global risk appetite over the past weeks.
In March, Denmark’s central bank was forced to take extraordinary measures and conduct its largest currency interventions in more than a decade to prevent Krone. The central bank stated that its surprise interest rate hike in March was aimed at defending its euro peg followed a sudden shift in currency hedging, indicating that there is no structural pressure on the krone that would lead to a sustained period of tightening. Rather, the pressure on the krone was a result of Danish institutional investors selling kroner after they saw the value of their dollar stock portfolios tumble due to the global market sell-off, leading funds to reduce their current hedges on foreign assets and pushing the Danish krone down.
Looking ahead, changes in the dollar outlook are likely to remain tied to both global risk appetite as well as the dynamics of the local US pandemic, which remains exceptionally severe compared to other developed economies.
For the Krone, developments in the eurozone, such as the ongoing EU budget and mutual debt talks will be relevant, as well as domestic DKK factors.
The pegged DKK remains at the mercy of developments in global risk appetite
Author: Ima Sammani, FX Market Analyst