Was the Krone a Safe Haven during the Sovereign Debt Crisis? - Part 1

Authors Jørgensen, Anders; Larsen, Christoffer Christen; Risbjerg, Lars
Subject Danish Economy
Type Monetary Review  
Year 2013
Published 10 July 2013
The term "safe haven" is often used about assets that can protect investors from losses during financial turmoil. If the value of an asset increases in connection with financial turmoil, this is a sign that it is a safe haven. This article examines whether the krone was a safe haven relative to the euro at the height of the sovereign debt crisis in parts of the euro area from July 2011 to July 2012. During this period, the krone strengthened against the euro, against the backdrop of strengthening volatility in the financial markets. The development of the krone relative to the euro during the sovereign debt crisis was unusual compared with previous periods of financial turmoil. The situation during the sovereign debt crisis was an extraordinary situation, since, on account of Denmark's fixedexchange- rate policy, some investors saw the krone as an opportunity to hedge the risk of a break-up of the euro. This was particularly notable in the market for currency options between kroner and euro. All in all, the analysis in this article indicates that the krone was a safe haven relative to the euro at the height of the sovereign debt crisis from July 2011 to July 2012.