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Introduction to monetary and foreign-exchange policy

Monetary policy

Foreign-exchange policy / ERM II

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Foreign-exchange reserve

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Foreign-exchange policy / ERM II

The krone foreign-exchange market is the market for purchase and sale of foreign exchange against Danish kroner. The foreign-exchange market is central to the monetary and foreign-exchange policy since this is the market where the krone rate is formed and where Danmarks Nationalbank intervenes by buying and selling foreign exchange. In the short term Danmarks Nationalbank can stabilise the krone by buying and selling foreign currency in the market. When Danmarks Nationalbank sells foreign currency (and buys kroner), the krone will tend to strengthen. When Danmarks Nationalbank buys foreign currency (and sells kroner), the krone will tend to weaken.

The formal framework for the Danish fixed-exchange-rate policy is the European Exchange Rate Mechanism (ERM II). Denmark participates in ERM II with a central rate of kr. 746.038 per 100 euro. The central rate is a conversion of the central rate vis-à-vis the D-mark before the third stage of EMU and was last adjusted in January 1987. The standard width of the fluctuation band in ERM II is +/- 15 per cent. Due to its high degree of convergence, Denmark has entered into an agreement with the European Central Bank (ECB) and the euro area member states on a narrower fluctuation band of +/- 2.25 per cent. This means that the krone can only fluctuate between kr. 762.824 per 100 euro and kr. 729.252 per 100 euro. In recent years Danmarks Nationalbank has maintained a stable krone rate closer to the central rate.

The euro is at the core of ERM II, and the other participating currencies have central rates vis-à-vis the euro, but not vis-à-vis each other. The obligation to intervene if a participating currency reaches one of its fluctuations margins rests on the central bank of the relevant member state and the ECB only. Other participating member states are under no obligation to intervene. ERM II comprises a commitment to unlimited intervention credit between the ECB and the central bank of the participating country in intereventions at the margin.

Currently Denmark, Latvia and Lithuania participate in ERM II [without severe tensions]. One of the convergence criteria for euro participation is observance of the normal fluctuation band within ERM II for at least two years. In the same period, the member state must not have devalued its currency against the euro.

Last update: 01/21/2014

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