Earlier today the Danish Central Bank raised the key interest rate by 50 basis points to 5.50%. In a statement the bank said:

“As a result of continued intervention to support the Danish krone, Denmark’s Nationalbank increases the lending rate and the rate of interest for certificates and deposits from 5 percent to 5.5 percent”.

The move is designed to protect the currency, which is pegged to the Euro, in the face of recent foreign exchange outflows.

It is the second hike in the key interest rate in three weeks, the rate was hiked by 40bp on October 7th from 4.60% to 5.00%. However, today the discount rate and the current account rate were kept unchanged at 4.50%.

Denmark’s rate increase comes just a couple of days after the Hungarian Central Bank, Magyar Nemzeti Bank, raised their base rate by 300 bp from 8.50% to 11.50% , in an attempt to defend the Forint.

During a time when it would appear that Central Bankers are competing to see who can weaken their currency the fastest, such defensive hikes in interest rates may be a warning sign of even more severe problems ahead.

At one point today Sterling was down by over 10% on the day against the Yen, less than 140 Yen for your Pound. On Monday you could get close to 180. In August you could get 215. Last year the peak was 250. Against the US Dollar, things are less terrible. Five year lows only mean a slightly less than 25% drop in the number of Dollars-per-Pound from the year highs.

However, there is a point when the pursuit of devaluation by a bankrupt Government, interprate that how you will, goes too far and the world turns round and says it wants nothing to do with your currency. It is a fine line between the intentional devaluation of a currency and the unintentional collapse.

At that point, the Central Bank would have to dramatically raise rates or face a rout of the currency. The thought of ERM 2 must have reached the minds of some of those in Threadneedle Street today. How would the market react if, at the start of a recession, they suddenly do a 180 and ramp up interest rates?

This all begs a question. Which global player has the currency most likely to go in to crisis? And, just as importantly, when might that crisis be?

With all respect to Denmark, Hungary and Iceland, who have even more problems, these country’s currencies are not key players on the global stage. However, as history has shown, before any big blow up there will be warnings from the periphery.

Think the Bear Stearns hedge funds in February 2007 . . . Warning. Or closer to home, how new build flats signalled an impending turn in UK property prices in September 2006, when some were selling at 40% off . . . Warning. How UK GDP growth rates confirmed a very negative trend change in 2007 . . . Warning.

Could it be the same with what has happened over the last few days and weeks with the assorted European currencies? The foreshadowing of a bigger and badder currency crisis to come.

If it is, then it could mean that the toppling of Crisis Domino number 5 is closer than was thought. Though the declines in Sterling could be classed as a dramatic devaluation.

Whenever the Currency Crisis Domino topples, my guess is that it will be a G7 currency. Be it this year, next year or, which would have been my guess a few months ago, when all the monetary inflation recently created finally comes home to roost a few years from now.

For now, the battered currencies are due a breather. The overdue technical bounce in the stockmarkets should help many of those currencies beaten up in recent weeks to stage a partial recovery. However, the fundamentals haven’t changed.

The massive personal debt accumulated by consumers in Anglo-Saxon economies hasn’t gone away. The mountains of debts and unfunded liabilities created by profligate western governments is still there. The transition of power from the West to the East is continuing. The big picture stuff is still the same. The Yen and Yuan are still in secular bulls. Sterling and the US Dollar are still in secular bears.

The warning signs are there. Iceland, Hungary and Denmark are hinting at the dangers, and surprises, that might lay ahead. As the massive liquidations continue amidst the Great Deleveraging the only thing that seems to be certain is the uncertainty.