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Safe havens: How about the euro?
By CNN's Tony Campion
LONDON, England (CNN) -- When the European single currency was launched in January 1999, it was billed as the start of a new prosperous era for the 12-nation region. Everyone expected the new euro to boom. Some people talked about it gaining 20 percent on the mighty U.S. dollar. But things did not turn out quite that way. Instead of battering the dollar, it was the euro that was bruised -- sinking like a stone on foreign exchange markets and casting a dark shadow over the monetary policies of the European Central Bank. Now, nearly four years on, the euro finally appears to have found some stability -- and respect -- as it trades just above parity with the dollar. Much of its new-found strength has comes from a weaker-than-expected recovery in the U.S. economy, which has caused investors to shift their money into European equities. And as U.S. troops prepare for war in the Gulf, investors are again looking for safer places to put their money. "Any increase in geo-political tension does lead investors to seek out those countries which offer the greatest security -- and security comes not from yield and it doesn't come from growth -- security comes from countries which don't need to be actively borrowing money on the money markets," says Nick Parsons, currency strategist at Commerzbank. Money flows away from currencies in countries that are borrowing to fund a current account deficit, like the U.S., to those with a surplus, like Switzerland where the franc has traditionally been a safe haven. Now the euro is attracting the same attention. "Even if the war in the Gulf is a fairly short-lived affair, I think that it will continue to be a currency of focus for central banks and international investors, simply because of their previous weightings in the euro versus the U.S. dollar," says Neil Parker, currency analyst at Royal Bank of Scotland. Adding to the dollar's woes is the appointment of John Snow as U.S. treasury secretary, which has sparked debate about his commitment to the strong dollar policy of his predecessor, Paul O'Neill. Making matters worse, U.S. interest rates are at four-decade lows -- meaning the returns on investments are less attractive than elsewhere -- and dollar-denominated equities are falling in value as U.S. financial markets continue to struggle. Analysts say the dollar is likely to remain in the doldrums in 2003, meaning the euro's fifth year of existence just might be its strongest.
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