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Currency war in Europe takes another twist as Danes cut rate to -0.2%

General Views Of Denmark's BanksGeneral Views Of Denmark's Banks
Scared euro investors not welcome here, either.Photograph by Ulrik Jantzen — Bloomberg via Getty Images

After another of the Eurozone’s neighbors cut interest rates to stop its currency rising against the euro as the financial world braces for a big new monetary stimulus from the European Central Bank.

The Danish central bank cut its main interest rates by 0.15 percentage point to leave its key lending rate at 0.05% and its rate on certificates of deposit–the rate which forms the actual floor for Danish money market rates–at -0.20%.

That follows the dramatic move Thursday by the Swiss National Bank to remove the cap on the franc’s exchange rate against the euro, which triggered a 15% rise in the franc that wiped out a handful of retail foreign exchange brokerages, at least one long-established hedge fund and reportedly cost some major banks over $100 million.

Learn more of the latest news from the Swiss National Bank from Fortune’s video team:

Observers saw the move as designed to ward off a speculative attack by to push the Danish krone higher against the euro, something that would make life difficult for the country’s exporters. As with Switzerland, the Eurozone is Denmark’s biggest trading partner, and rising expectations that the ECB will announce a massive program of bond-buying to stop deflation on Thursday have put downward pressure on the euro in foreign exchange markets.

The similarities with last week don’t end there. As with Switzerland, Denmark runs a large current account surplus, and the central bank has been forced to buy large amounts of euros to keep the exchange rate stable in recent years as investors have sought shelter from the Eurozone’s political uncertainties.Its foreign reserves have doubled since the eruption of the financial crisis in 2008.

The Danish announcement, like the Swiss one, was also unscheduled and took the market completely by surprise.

Earlier Monday, the Swiss National Bank’s governor, Thomas Jordan, confirmed in an interview that the SNB had abandoned its policy of capping the franc’s exchange rate because he was afraid of losing control of his currency altogether.

But in contrast to Switzerland, Denmark has a small capital market and has never wanted its currency to be used as any sort of safe haven. For that reason, it has traditionally run its policy first and foremost by keeping the krone in a narrow range against the euro (and prior to 1999, the Deutsche mark) and set interest rates at a level needed to keep it there. By contrast, the SNB never viewed its exchange-rate cap as anything more than a temporary measure.

To be sure, a deposit rate of -0.20% is nowhere near as aggressive as the SNB’s new rate of -0.75%. It’s not even a record low, as the Danes had experimented with negative interest rates only three years ago. But Jan Størup Nielsen, an economist with Nordea in Copenhagen, says it’s quite possible they will cut more if the exchange-rate peg comes under threat again.

“Such a cut could come already this Thursday after the much awaited ECB-meeting,” Størup Nielsen said in a note.

The euro, meanwhile, has careened to a series of multi-year lows against the dollar as expectations of an ECB “Quantitative Easing” program have risen. By late trading in Europe Monday it was at $1.628, down 4% since the start of the year alone. A survey by French bank SocGen Monday showed investors expect a program of at least €500 billion ($580) to be announced.

With its neighbors putting on the hard hats so ostentatiously, the ECB now faces the risk of disappointing markets Thursday, many say. Stephen Jen, founder of hedge fund firm SLJ Macro, argued Monday that “any disappointment by the ECB this Thursday would lead to a significant tightening in the financial conditions, which is something we presume the ECB will try to avoid.”

Jen says the euro still has a long way to fall against the dollar as the ECB’s stimulus increases. He argued it “will likely launch a multi-phase QE in the coming quarters and there will be logical consequences for the euro.”