The European currency has become unusual safe haven in during in the rise of volatility that has conquered the world currency markets in the recent months.
Assets ranging from Japanese stocks to emerging-market bonds to U.S. Treasuries have slumped this spring, as investors brace for the possible pullback from easy-money policies by the world’s major central banks. At the same time the euro has largely avoided the high volatility of the dollar and the yen and has appreciated to reach $1.3345 at Friday. This move constitutes a dramatic reversal for the European currency that has been at the center of economic and financial turmoil in the recent years.
The appreciation of the euro has led a lot of currency traders to abandon their bets against the euro. Many traders have initiated positions against the euro in the expectations the common currency will fall due to the prolonged recession in the euro zone and the question of the long–term viability of the currency union.
Problems Euro-Zone Faces
Despite the problems that the euro-zone faces – the rising unemployment and he mounting debts, the euro has appreciated against its major rivals which has led a lot of traders to unwind their positions against the common currency after suffering from significant losses. In addition to that many currency traders buy the euro as a safe haven. They think that the European currency has much more in common with other safe haven such as the yen and the dollar than with the currencies of the emerging markets which are taking a major hit as the possibility of FED reducing its stimulus leads many traders to reduce their exposure to risky high-yielding assets and currencies of the emerging markets.
The strength of the Euro has however some negative consequences. It is not very beneficial for the exports of struggling economies such as Spain, Portugal and Italy, who need devaluation in order to make their exports more competitive. Until FED reduces the printing of money or the ECB increases its own printing the possibility of euro weakening remains low.
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