* Norwegian crown set for gains in the short term
* Flows into Danish assets could wane
* Solid economic fundamentals make Nordics a safe haven
By Anirban Nag
LONDON, June 26 The Norwegian crown is set for gains against the euro and should eclipse the Danish currency as a favourite among investors seeking shelter from turmoil in the euro zone.
Analysts say recent strong demand for the Danish crown could shift towards the Norwegian currency as the two countries' central banks signal starkly different interest rate paths.
Investors have sought safety in Scandinavian assets in recent months, attracted by the countries' triple-A credit ratings and sound public and external finances.
Denmark is a member of the European Union but voted in 2000 against adopting the euro. Its central bank intervenes to keep the crown pegged within a band against the common currency. Oil-rich Norway is not in the EU.
However, the surge of investment into relatively small economies, such as Denmark, Norway and, outside the Nordic region, Switzerland, has caused headaches for policymakers who have threatened aggressive action to check currency gains.
Since early May, fears of a chaotic euro break-up and the risk of contagion have seen investors flock to the Danish crown. But Norway's central bank, Norges Bank, said last week it could start raising rates sooner than previously thought and that it expected the currency to gain.
By contrast, the head of the Danish central bank warned last week that policymakers may introduce negative interest rates to deter investors rushing to buy fixed income assets.
"The Norwegian crown will do better than the Danish crown in the near term as the Norwegians appear to be ready to tolerate more strength in their currency," said Niels Christensen, currency strategist at Nordea, Copenhagen.
"There is a fair bit the Norwegian currency can rise against the euro and we expect it to test the March highs soon."
While the Danish crown posted its biggest monthly advance against the euro in May since July last year, the Norwegian currency barely eked out gains against the euro last month.
The Norwegian crown hit a nine-year high of 7.3927 crowns per euro in early March before the Norges Bank cut rates in a surprise move. That depressed the crown, though it has since recovered.
Worries that the Norges Bank could ease policy again kept investors wary of the Norwegian crown. But last week's comments seemed to change that. On Tuesday, the euro was trading at 7.4975 Norwegian crown.
The value of Norway's crown has been closely correlated with the price of oil, of which it is a major exporter, and growth-linked assets like stocks and commodities . But Citi currency strategist Josh O'Byrne said the importance of these factor would diminish in favour of interest rate differentials.
He expected the euro to come under pressure on expectations the European Central Bank would cut interest rates and recommended investors sell the euro for Norwegian crowns via two-month option structures. These would cover two ECB rate-setting meetings and expire just before the next Norges Bank policy decision.
"Rate differentials still play a comparatively large role," he said. "While still cautious, the Norges Bank is decidedly less dovish than any other European central bank. There could be potential for rate differentials to move further in favour of Norwegian crown given outlook for policy."
The Danish crown hit a five-month high against the euro in late May, mirroring a sharp appreciation late last year due to flight out of euro zone assets.
The central bank spent more defending the crown last month than at any time since the start of 2010. For similar reasons, the Swiss National Bank has been absorbing large amounts of euros to defend the Swiss franc's peg of 1.20 francs per euro.
Danish central bank Governor Nils Bernstein said the upward pressure on the crown had been its most severe in his seven years in the job, the Financial Times reported, and warned negative rates could be introduced to curb the currency's strength.
The comments last week spooked investors, said Nordea's Christensen, but he added that if euro zone debt problems worsened impetus for the crown to strengthen would return. He said the crown's recent high of 7.43 per euro could draw more intervention from the central bank, keeping gains in check.
On Tuesday, the euro was at 7.4334 Danish crowns.
Analysts said the Swedish crown could also see some upward pressure against the euro.
Sweden's currency, though, could lag given the economy's strong trade links with Europe, which pose a risk. However, Sweden's robust credit fundamentals and relatively strong debt ratios meant it was set for gains.
Strategists at JPMorgan have cut their year-end forecasts for the euro against the Swedish and Norwegian crowns.
For the euro/Swedish crown they cut the forecast to 8.90 crowns from 9.00 earlier, while for euro/Norwegian crown they lowered it to 7.45 crowns from 7.60. The forecasts suggested the Norwegian crown could gain more than its Swedish counterpart.