"Safe-haven" euro could complicate ECB plan to roll back stimulus

The euro’s rise above $1.20 this week has prompted talk that it is becoming a safe haven for investors, posing a problem for the European Central Bank as it plans to roll back its huge economic stimulus in the coming months.

Many remain sceptical that a currency which has undergone ordeals such as the Greek debt crisis in recent years can join the Swiss franc CHF= as a place to store money in times of market stress. 

Nevertheless, the euro EUR=EBS has remained strong against the dollar in the past two weeks despite concerns about a standoff between the United States and North Korea which have sent spasms of selling through global stock markets. 

Add in a series of high-level departures from the U.S. administration and President Donald Trump’s failure so far to get his plans for corporate tax cuts and big infrastructure spending through Congress, and some investors are reassessing their attitude towards the single currency. 

“Disappointment about U.S. reflation and disarray in the White House have enhanced the relative attraction of the euro to the extent that a discussion around its safe-haven credentials has opened up,” said Jane Foley, senior FX strategist at Rabobank in London. 

In recent years, investors’ appetite for risk and the euro’s value have largely moved in tandem. Particularly during flare-ups in the euro zone debt crisis in 2011 and 2013, a selloff in equities or emerging market debt would drag the euro lower. 

But now the euro seems to be gathering momentum. If the currency sheds its role as a proxy for risk appetite, ECB policymakers who meet next week will have to factor in its economic impact. 

In particular they will be wary of a strong euro hurting exporters and undermining their efforts to push low inflation back up to the ECB’s target, just as they are preparing to start winding down a 2 trillion euro ($2.4 trillion) plus bond-purchase programme. 

The euro is still far from an undisputed safe haven, with memories of the debt crisis fresh and policymakers struggling to push wage growth higher. However, its near 14 percent rise versus the dollar this year has led investors to note its structural strengths.