February 3, 2015 / 4:12 PM / 5 years ago

UPDATE 2-Danes spend $16 bln to weaken crown; reserves at record high

(Adds political comments, further cbank action)

COPENHAGEN, Feb 3 (Reuters) - Denmark’s central bank said on Tuesday it had spent 106 billion Danish crowns ($16 billion) intervening in foreign exchange markets in January and had boosted its reserves to a record high as it tried to keep the crown stable with the euro.

The central bank sold crowns at unprecedented rates to weaken the currency and bought foreign currency, boosting foreign exchange reserves to 564 billion Danish crowns.

Denmark pegs the crown to the euro, allowing its currency to fluctuate 2.25 percent either side of a parity rate of 7.46038 crowns to the euro. The crown has been straining against the upper end of that range since Switzerland scrapped its ceiling on the franc and the European Central Bank announced a bond-buying scheme to aid its economy.

The bank cut its key policy rate three times in January to -0.50 percent and suspended for now a government debt issuance programme, which it hopes will reduce rates on longer-dated debt, making it less attractive to foreign investors.

It had previously said it would not waver from the fixed currency policy, which Denmark has had in one form or another since the 1980s, linking the crown first to the deutsche mark, then to the euro.

Danish Prime Minister Helle Thorning-Schmidt said earlier on Tuesday she was confident the central bank would keep to its policy, a sentiment shared by the leader of the Eurosceptic Danish People’s Party. The party is likely to become a kingmaker in a general election this year after soaring support during a period of relative austerity.

“Speculators should not be allowed to overturn the fixed exchange rate policy. In the current situation we support the central bank doing everything it deems necessary to defend the policy,” party leader Kristian Thulesen Dahl told Reuters.

Economy Minister Morten Ostergaard held a telephone conversation with the central bank governor, Lars Rohde, on Tuesday and later told Reuters he had “no sleepless nights” over its policies, even the suspension of government bond issues.

Analysts said for now the central bank had the tools to keep the crown stable. Because it is selling crowns, its level of intervention is theoretically limitless, since it can print crowns.

“If the flow continues, the central bank will unhesitatingly continue to sell Danish crowns in the market,” said Jan Storup Nielsen, a senior analyst at Nordea, adding he saw an additional rate cut of 25 basis points and potentially other measures too.

$1 = 6.5054 Danish crowns Reporting by Teis Jensen and Erik Matzen; Writing by Sabina Zawadzki; Editing by Larry King

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