The foreign-exchange reserve


Danmarks Nationalbank holds a foreign-exchange reserve in order to have funds for intervention in the foreign-exchange market. The foreign-exchange reserve is an important element of Denmark's fixed-exchange-rate policy.

Factors influencing the exchange rate of the krone

The exchange rate of the krone is determined by the supply of and demand for kroner in the foreign-exchange market. Part of the activity in this market is attributable to trade in goods and services across national borders, while most of it reflects cross-border capital flows. When capital flows into Denmark, the krone normally strengthens; when capital flows out, it weakens.

In the short term, Danmarks Nationalbank can keep the krone stable by buying and selling foreign exchange in the market. When Danmarks Nationalbank purchases kroner against euro, the krone tends to strengthen, all other things being equal. Conversely, when Danmarks Nationalbank sells kroner against euro, the krone tends to weaken.

In situations with a sustained inflow or outflow of foreign exchange and pressure against the krone, Danmarks Nationalbank unilaterally adjusts its interest rates to stabilise the krone. Read more about the monetary-policy interest rates and the transmission mechanism.

The size of the foreign-exchange reserve
Two factors primarily affect the size of the foreign-exchange reserve: purchase and sale of foreign exchange by Danmarks Nationalbank and central-government borrowing.
When Danmarks Nationalbank buys kroner and sells foreign exchange to support the krone, the foreign-exchange reserve decreases – and vice versa, when Danmarks Nationalbank intervenes to weaken the krone, the foreign-exchange reserve increases.

The purpose of the central government's foreign borrowing is to maintain an adequate foreign-exchange reserve. When the government raises foreign loans, this increases the foreign-exchange reserve, while repayments of foreign loans reduce it. Read more about the central government's foreign borrowing.

The size of the foreign-exchange reserve is also affected by current exchange-rate adjustments and returns on investment. Adjustments are made at year-end and recognised at end-January.

Developments during the financial crisis in the autumn of 2008, when the Danish krone came under pressure, showed that at times substantial purchases may be required in order to support the krone. Based on the lessons learned in that connection, the foreign-exchange reserve was increased from the end of 2008, cf. Chart 1, in order to have sufficient funds to support the fixed-exchange-rate policy against the euro. The increase was partly achieved by raising central-government loans in foreign currency, but market conditions also made it possible for Danmarks Nationalbank to purchase foreign exchange.

 

How is the foreign-exchange reserve invested?
The foreign-exchange reserve comprises secure and liquid assets, mainly in the form of deposits in foreign banks and foreign securities which can be sold or pledged as collateral at very short notice if necessary. In view of the fixed-exchange-rate policy, the foreign-exchange reserve is primarily in euro. Read more about Danmarks Nationalbank's financial risk management.

Danmarks Nationalbank's stock of 67 tonnes of gold is also included in the foreign-exchange reserve, as are a number of accounts with the International Monetary Fund (IMF). Read more about Danmarks Nationalbank's accounts with the IMF.

Announcement of the foreign-exchange reserve

Danmarks Nationalbank announces the size of the foreign-exchange reserve at the end of each month, as well as any intervention etc. during the month. The announcement is made at 4 pm on the 2nd banking day of the following month via the press release Foreign Exchange and Liquidity and Monthly Balance Sheet. The press releases can be downloaded from Danmarks Nationalbank's website.