February 20, 2015 / 2:58 PM / 5 years ago

UPDATE 1-Crown hits 8-month low as Denmark raises capital controls option

(Recasts, adds fresh quote)

By Anirban Nag

LONDON, Feb 20 (Reuters) - The Danish crown fell to its lowest in over eight months against the euro on Friday, after a government adviser said the country would be prepared to introduce capital controls to defend its currency peg, traders said.

Hans Jorgen Whitta-Jacobsen, the head of the Economic Council, told Reuters the central bank was willing to use extreme measures including capital controls to defend the peg to the euro “to the last drop of blood”.

The crown fell to 7.4640 per euro, its lowest since early June 2014. The euro was last up 0.23 percent at 7.4615 crowns, a substantial move for a pair that usually trades in a 0-0.01 percent range, and on track for its biggest daily move since 1999, when the single currency was introduced.

“The news that capital controls are being considered was the main reason for the lower crown,” said a trader at a Danish bank in Copenhagen. “It has been pretty volatile, but it is too soon to say that the upward pressure on the Danish crown is ebbing.”

Currency flows into Denmark have picked up on speculation it may abandon the peg after Switzerland shocked markets by removing its franc/euro cap on Jan. 15.

Since then, the Danish central bank has intervened aggressively in the currency market and cut interest rates deep into negative territory. Its deposit rate of minus 0.75 percent is the same as the Swiss National Bank’s.

Whitta-Jacobsen said there was no parallel between the Swiss and Danish cases, and two weeks ago central bank governor Lars Rohde told Reuters the bank would do “whatever it takes” to protect the fixed currency policy.

Under the Exchange Rate Mechanism (ERM II) set up with the launch of the single currency, Denmark agreed to keep the crown in a corridor of 2.25 percent either side of a central rate of 7.46038 to the euro. In practice, it has kept it within 0.50 percent.

It spent a record $15 billion intervening last month to keep the currency within the tight range.

Analysts said worries about Greece and an imminent European Central Bank bond purchase programme were likely to put further upward pressure on the crown.

In response, Denmark’s central bank could intervene more aggressively, cut rates further or possibly launch its own quantitative easing (QE) programme of asset purchases.

ING said that, given Denmark’s task of sending effective signals to the market had become increasingly difficult, “we believe that QE may eventually be required.” (Reporting by Anirban Nag; Editing by Robin Pomeroy and John Stonestreet)

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