The euro is staking its claim as an alternative to the dollar (FOREX:EURUSD) on concern the world’s largest economy is destined to suffer fiscal upheavals every few months.
Europe’s common currency, which as recently as July 2012 was in jeopardy of breaking up as the region’s sovereign-debt crisis heated up, is increasingly acting like a haven. It’s this year’s best-performer among a basket of 10 developed-market currencies and its correlation to the 20 most-traded emerging- market currencies has tumbled more than 40% to the lowest since 2003, data compiled by Bloomberg show.
President Barack Obama said the 16-day federal government shutdown in the U.S. this month “inflicted completely unnecessary damage,” on the economy, while a last-minute deal in Congress to temporarily lift the debt ceiling concentrated attention on the next fiscal hurdle in December. The 17-nation euro area, which includes Greece, looks calm by comparison.
“The euro certainly has some appeal, and we’re slightly long,” Adnan Akant, the New York-based chief investment officer for foreign-exchange at Fischer Francis Trees & Watts Inc., which oversees $56 billion, said in an Oct. 18 phone interview. “U.S. investors are now pouring money into global assets, selling dollars.”
The euro climbed to $1.3704 on Oct. 18, approaching this year’s high of $1.3711 in February, which was the strongest level since November 2011. It has rallied about 7% from an almost five-month low of $1.2746 reached in April, and was at $1.3670 as of 12:07 p.m. in New York.
It advanced 5.8% against a basket of nine developed- market peers this year, the best performance in the group and compared with the dollar’s 1.7% gain, Bloomberg Correlation-Weighted Indexes show. The euro dropped each calendar year from 2009 to 2012, plunging 20%.
The euro’s correlation with a Bloomberg index of emerging- market currencies fell to 0.34 on Oct. 15, the lowest since May 2003. A reading of 1 means they’re in lockstep and minus 1 means they move in opposite directions. The correlation between IntercontinentalExchange Inc.’s Dollar Index to the same basket has risen to its highest level of the year.
The dollar remains the global reserve currency, representing 62% of holdings at the end of the second quarter, according to the International Monetary Fund. The euro amounted to 24% of the total for the same period.