Euro draws investors seeking a safe haven

Mario Draghi, president of the European Central Bank, said Thursday in Frankfurt, Germany, that the euro is recovering at “a slow pace.”
Mario Draghi, president of the European Central Bank, said Thursday in Frankfurt, Germany, that the euro is recovering at “a slow pace.”

The euro is becoming a haven for investors who just three years ago pushed the 17-nation currency union close to breakup.

A 90-day measure tracking changes in the euro and a Citigroup Inc. index of bond and swaps risk has turned positive for the first time since November 2008, meaning the currency is gaining favor as investors’ perceptions of turmoil in financial markets change. Hedge funds and other large speculators are the most bullish on the euro since 2011, data from the U.S. Commodity Futures Trading Commission show.

Although European Central Bank President Mario Draghi said Thursday that risks for euro-area growth remain on the “downside” and the euro fell to a six week low against the dollar, investors are taking comfort as the region emerges from its longest recession and a sovereign-debt crisis. That’s making the euro a refuge for traders fleeing emerging market nations missing out on a global recovery.

“The euro remains resilient, and repatriation from emerging markets is playing an important role,” said Valentin Marinov, the London based head of Europe Group of 10 foreign-exchange strategy at Citigroup, the second biggest currency trader. “It could continue to play a safe haven role as a liquid reserve currency, so long as tail risks of the eurozone breakup are held at bay.”

The euro will end the year around current levels, according to Marinov, a more optimistic projection than the median forecast in a Bloomberg survey of analysts, which has the currency falling to $1.28.

The euro strengthened to as high as $1.3189 Friday after a report showed U.S. employers added fewer workers last month than forecast, damping speculation the Federal Reserve will cut bond purchases as early as this month.

Over the past six months, the euro has strengthened against all but three of 31 major peers tracked by Bloomberg, gaining 17 percent against India’s rupee and 15 versus Indonesia’s rupiah. It advanced against all major emerging-market currencies except the Chinese yuan and Bulgarian lev in that period.

The declines in currencies of nations viewed by investors as higher risk accelerated May 22, when Fed Chairman Ben Bernanke signaled that the central bank might begin tapering the pace of asset purchases at one of its “next few meetings.” The declines picked up last month as the U.S. discussed striking Syria amid allegations of a chemical-weapons attack by the Middle East nation’s government.

More than $47 billion has left global funds investing in emerging-market bonds and stocks since May, extending the outflow this year to $7.5 billion, according to data last month from EPFR Global.

Outflows in the week that ended Aug. 28 were the highest in two months, with record withdrawals being recorded for Mexico and Philippine equity funds, EPFR said Aug. 30.

“The euro is perceived as a safe haven in the current environment, where we’re not in a G-10 crisis, but an emerging-market one,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said Tuesday. “People who were very, very negative on the eurozone were very, very wrong on that. These people have now changed their mindsets.”

Although the euro has fallen more than 2 percent versus the dollar since reaching a six month high of $1.3452 on Aug. 20, it has remained within the past year’s trading range of $1.2502 to $1.3711, data compiled by Bloomberg show.

That’s up from as low as $1.1877 in June 2010, when the euro sovereign-debt crisis was deepening, and compares with $1.2043 in July 2012, before Draghi said he’d do “whatever it takes” to save the shared currency.

The euro climbed 4.9 percent against a group of nine developed-nation peers this year, the biggest gain after the dollar, which rose 5.1 percent, according to Bloomberg Correlation-Weighted Indexes.

The European Central Bank left its main refinancing rate at a record-low 0.5 percent Thursday for a fourth month, in a decision predicted by all 47 economists in a Bloomberg News survey.

“The overall improvements in financial markets seen since last summer appear to be working their way through to the real economy,” Draghi said at a news conference in Frankfurt, Germany. The eurozone is recovering “at a slow pace,” and European Central Bank policy will “remain accommodative for as long as necessary,” he said.

Although the currency’s resilience reflects confidence in Draghi’s efforts to safeguard the eurozone’s future, an overvalued currency risks making exports less competitive, endangering the recovery.

The region’s economy expanded 0.3 percent in the second, in line with a previous estimate, the European Union’s statistics office said Wednesday.

Exports rose a seasonally adjusted 3 percent in June, the first increase in three months the EU said Aug. 16.

Spain and Greece remain in recession, and the currency bloc is grappling with a record 12.1 percent unemployment rate.

Although Germany’s economy will grow 0.5 percent this year, the euro area will shrink 0.6 percent, according to Bloomberg economist surveys. The U.S. is estimated to expand 1.6 percent.

“While Germany might be showing some positive signs, we’ve still got these horrific numbers elsewhere in peripheral Europe,” Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London, said Tuesday. “So the likelihood that you’re going to have markets that outperform” starts “to dwindle.”

The euro might decline to about $1.25 this year if the Fed sticks with its timetable for tapering stimulus and investors start pricing in higher interest rates, Derrick said.

Even as some traders bet that the euro would fail to survive, its share of $11.1 trillion of worldwide currency reserves remained above levels immediately after the 1999 debut, International Monetary Fund data show.

The euro’s share was 24 percent in March, compared with 28 percent in September 2009 and as low as 17 percent in September 2000.

The euro is the most widely traded currency after the dollar, according to the Bank for International Settlements. Europe’s shared currency accounted for 33 percent of the $5.3 trillion average daily turnover in foreign-exchange markets in April, compared with 87 percent for the dollar, the Bank for International Settlements said in a report this week.

Because foreign-exchange trades involve two currencies, the sum of percentage turnover is 200 percent.

“It’s difficult to find something negative for the euro at the moment, or at least not anything that’s in focus,” Niels Christensen, the chief currency strategist at Nordea Bank AB in Copenhagen, said Wednesday. “When there’s more optimism about the economy,” then “suddenly there’s a positive spiral for the euro.”

Business, Pages 31 on 09/07/2013

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