Euro calm lures investors shaken by US disruptions

NEW YORK — The euro is staking its claim as an alternative to the dollar 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 danger of breaking up as the region’s sovereign-debt crisis heated up, is increasingly seen as a haven. It’s this year’s best performer among a basket of 10 developed-market currencies.

President Obama said the 16-day US government shutdown this month ‘‘inflicted completely unnecessary damage’’ on the economy, while a last-minute deal in Congress to temporarily lift the debt ceiling focused attention on the next fiscal hurdle, in December. The 17-nation euro area looks calm by comparison.


The euro climbed to $1.3704 on Oct. 18, approaching this year’s high of $1.3711 in February. It has rallied about 7 percent from an almost five-month low of $1.2746 in April.

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It advanced 5.8 percent against a basket of nine developed-market peers this year, the best performance in the group and compared with the dollar’s 1.7 percent gain, Bloomberg Correlation-Weighted Indexes show. The euro dropped each calendar year from 2009 to 2012, plunging 20 percent.

Still, the dollar remains the global reserve currency, representing 62 percent of holdings at the end of the second quarter, according to the International Monetary Fund. The euro amounted to 24 percent of the total.

As recently as October 2011, the currency bloc was running a deficit in its current account, the broadest measure of trade because it includes investments. On Oct. 17, the same day US borrowing authority was due to expire, the euro region posted a surplus of 17.4 billion euros ($23.8 billion) for August, up from 15.5 billion euros the previous month.

‘‘Looking at both trade and portfolio flows, you have to say the euro’s in a much stronger position,’’ said Steve Barrow, at Standard Bank PLC. He predicts the euro will advance to $1.40 in the next two months.


The European Central Bank has boosted confidence in the euro by offering to buy indebted member states’ debt. But it has not yet had to do that, sidestepping the currency-depreciating money-printing policies of the US Federal Reserve and the Bank of Japan.

The euro area emerged from a record-long recession this year, with the economy growing 0.3 percent in the second quarter.

Bonds sold by the euro region’s most-indebted peripheral nations have become safer buys as volatility in Spanish and Italian debt fell in September below that of US Treasurys, according to Citigroup Inc. That’s the first time the volatilities crossed since early 2011, the world’s second- largest currency trader said.

‘‘The volatility difference has adjusted the risk-reward dynamic between Treasurys and euro-area peripherals, which is why capital is flowing into European fixed-income, supporting euro-dollar,’’ Richard Cochinos, the head of Americas G-10 foreign-exchange strategy at Citigroup in New York, said in an Oct. 10 phone interview. He still predicts the euro will depreciate to $1.33 by year-end.

Investors’ optimism about the euro area contrasts with concern that US lawmakers will fail to reach a deal as the next fiscal impasse approaches. Last week’s accord sets a Dec. 13 date for completing budget talks that opened Oct. 17. It funds the government through Jan. 15 and suspends the debt limit through Feb. 7.


‘‘There are only so many times we can do this without the wolf really being at the door,’’ Senator Mark Warner, Democrat of Virginia, told Bloomberg Television Oct. 16. ‘‘This is not a responsible way to run the largest enterprise in the world.’’

Last week, Standard & Poor’s said the shutdown shaved at least 0.6 percent from economic growth this quarter. The Bloomberg US Dollar Index has fallen about 1 percent since the Oct. 16 congressional deal was reached. The dollar gauge dropped to an eight-month low of 1,000.70 Oct. 18, from 1,056.33 in July.