Unlimited supply of national currency?

Question

I was reading this article about Denmark central bank defending its currency peg:

http://www.bloomberg.com/news/2015-01-22/denmark-cuts-key-deposit-rate-to-minus-0-35-to-drive-down-krone.html

In it he said they had "plenty of Kroner to defend against hedge funds"

My understanding of the issue is since Euro is coming under pressure for launching QE program, a lot of funds are moving their money into countries like Denmark -- which cause their currency demand spiked -- and hence its price.

But why did he say they had "plenty"? Apart from law, there's nothing physically stopping a country from keep printing its own currency right?

So I imagine its not hard at all for any country to defend a peg if its demand side spiked -- just keep printing currency to maintain the price?

Why does it seem that Denmark has limited supply of its own currency?

Answer 1

He's being glib. The only constraints on their capacity are political, not from technical constraints or inventory issues. They can make more Kroner by changing their own balances at Danish banks, something they can do at will. As the recent Swiss episode shows, political constraints can be very real and powerful, but they certainly didn't stop defending the Swiss Franc floor because they ran out of Francs.

Answer 2

When a country, or perhaps a country's central bank, prints money it is increasing the money supply. When the amount of money available in an economy increases, the value of the currency will decrease. So think about the capital flight from the Euro to the Kroner that is causing the value of that currency to spike. Printing money can basically cause a 'reversal' of sorts. That is, it places downward pressure on the value of the currency.

So Denmark's banking authority might have some large stash of Kroner to meet the current demand. It can sell Kroner to counter-balance the new fluctuation in demand to keep its currency's value from spiking. Denmark might make this decision to avoid making its exports more expensive etc. However, it certainly does not have an unlimited supply of money. If it was willing to print an unending amount of money, Denmark's banking authority would actually be manufacturing hyperinflation.

I've written this in a non-techinical fashion. Please let me know if you want more details.