The economic environment has changed dramatically during the last two months of geopolitical turmoil. A horrific earthquake and tsunami in Japan has led to the worst nuclear accident since Three Mile Island. And a popular uprising in the Middle East has drawn western military powers into Libya.
During times of crisis, investors turn to safe havens — assets that can appreciate or at least hold their value amid rising risk. The U.S. dollar, the yen and the Swiss Franc traditionally play that role in the currency markets. Yet this time around, the recently maligned euro is gaining status as a safe-haven. It has rallied in recent weeks and rose 1.2 percent on Friday to $1.4182.
Since March 10th, the Swiss Franc has been the best performing major currency, rising up 3.26 percent, according to Jonathan Lewis, co-founder of Samson Capital Advisors, a money manager with $7 billion in assets. He says that “importantly,” the next best currency is the euro, up 2.45 percent, followed by the yen, up 2.44 percent.
Just last year, the euro was on death’s door. The economic union, referred to in reverential tones as “the European project,” was on the verge of being the dismantled — the flaws of half a century of diplomacy and economic theory supposedly laid bare by the financial crisis and recession.
“You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, told BusinessWeek in December, shortly after a $1 trillion bailout fund for weak member states was depleted. “The essential element of discipline in economic policy and in fiscal policy that was hoped for... so far (has) not been rewarded in some countries.”
The basic criticism was that the union encompasses weaker economies such as Greece and Ireland and stronger ones such as Germany, and how can one monetary policy accommodate them all during a time of crisis? Investors were having their doubts, too. Last May, the euro hit of a four-year low of less than $1.23 against the dollar, and retested those levels again in January.
Now, the euro is back, and it’s hotter than a latte.
“Given all the concerns about the Euro in recent months, to see its relative performance so strong during this period of crisis is telling,” Lewis said in a note to investors. Elaborating in an interview, he said European policymakers had gained credibility by their recent actions: coming together to aid member members, but also tackling inflation and spending.
Meanwhile, the dollar appears to have lost standing as a safe haven.
“The dollar has been surprisingly weak during this latest risk aversion episode,” Deutsche Bank currency analyst John Horner said in a note to investors. Part of the reason may be that the repatriation of Japanese money, which had been heavily invested in the U.S., during a time of crisis. Another factor: last weekend’s European summit, which “removed some of the risk premium of the single currency.”
Finally, interventions by Asian central banks have relieved investor apprehension and made them more comfortable leaving their money in emerging markets during a time of stress, according to Horner. That has prevented a stronger dollar rally.
As emerging markets gain credibility in the market, the need for a safe haven isn’t what it once was. And the competition for that safe haven status is on the rise from a resurgent Europe.
