Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why the Euro is Quietly Becoming a Safe Haven Currency
Transcript
- Lucas: Luna, I want to talk about something that feels almost counterintuitive right now. The euro is trading at roughly 1.16 against the dollar, essentially flat over the past week. But when you look at the headlines — persistent energy inflation, the Iran conflict reshaping supply routes, and the Fed still hawkish — you'd expect the euro to be getting crushed. Luna: Right. Normally a strong dollar narrative would push EUR/USD lower. So what's holding it up? Lucas: I think the market is starting to price in a structural shift. The trade-weighted dollar index is at 119.3, down from 119.37 last week — a small move, but it's been trending lower for months. Meanwhile, the euro is holding its ground. And if you look at the regional ETFs, they're actually up. VGK is 89.03, up 0.3% over five days. EZU and FEZ both gained 0.8%. Luna: So European equities are rallying even as the euro doesn't weaken. That's not the usual pattern. Lucas: Exactly. Usually a strong euro hurts exporters and weighs on stocks. But we're seeing both hold. I think the story is that the euro is quietly becoming a safe haven currency. Not in the Swiss franc sense, but in a 'less bad than the alternatives' sense. Luna: Because of the energy situation? Europe has been forced to diversify away from Russian gas, and now with the Iran war, there's even more pressure. That's actually built resilience. Lucas: That's exactly it. The ECB has been clear — 'will do what is necessary' to tame inflation. The Bank of France governor said that this week. And the market believes them. Meanwhile, the US is dealing with its own inflation persistence. Core inflation hit 3.3% in April, right in line with expectations, but it's not falling fast. Fed's Goolsbee said energy inflation has been more persistent than expected. Luna: So both central banks are hawkish, but the ECB's credibility is actually improving relative to the Fed's? Lucas: I think that's part of it. There's also a real shift in global reserve allocations. Central banks in Asia and the Middle East have been slowly diversifying away from the dollar for years. The euro is the natural alternative. With the Iran conflict destabilising the region, those flows may be accelerating. Luna: And we've seen Southern European bonds become a safe haven, which we talked about a few episodes ago. If Italian and Spanish debt are considered stable, that props up the whole currency. Lucas: Right. The spread between Italian BTPs and German Bunds has narrowed significantly. That's a vote of confidence in the eurozone's ability to hold together. And it's not just fiscal — it's structural. The European ETF boom is bringing liquidity, and corporate bond markets are overtaking banks as funding sources. That makes the euro area more resilient to shocks. Luna: So the euro as a safe haven — is this a temporary thing or a long-term shift? Lucas: I think it's still early, but the data supports it. Look at the real GDP growth number for the eurozone — 1.6% annualised, up from 0.5% last quarter. That's not spectacular, but it's a recovery. And nominal GDP is now 31.8 trillion. The economy is growing, even if unevenly. Luna: But what about the exporters? German carmakers, French luxury goods — they usually want a weaker euro. Lucas: They do. And a stronger euro will pinch margins in the short term. But if the currency strength is driven by capital inflows rather than speculation, it's more sustainable. Companies can hedge. And a stable currency is better than a volatile one for long-term planning. Luna: You know, this reminds me of something we haven't touched on — the liquidity risk in European ETFs. We did an episode on that, but if the euro becomes a safe haven, that could attract more capital into those funds, actually reducing liquidity risk. Lucas: That's a great point. The ETF liquidity concern was about a sudden sell-off. But if the euro is seen as a store of value, those outflows are less likely. The VGK and EZU inflows have been steady all year. Luna: Let's bring it back to the near term. The ECB meets in June. What's the market expecting? Lucas: Another rate hike, probably 25 basis points. But the real story is the tone. If Lagarde signals that the next move could be a pause, that might actually support the euro — it means confidence that inflation is under control. If she sounds worried, the euro could dip. But the underlying trend is clear. Luna: So the takeaway for listeners: don't assume a weaker euro just because the Fed is hawkish. The old playbook might not apply. Lucas: Exactly. And this is one of those quiet structural shifts that doesn't make front-page news but matters for anyone with exposure to European assets. Luna: Speaking of what matters — Lucas, a quick honest thing. We do this show without sponsors, without ads, and that's how we want to keep it. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that literally funds making these episodes. It's a small group, but it makes a huge difference. Lucas: Yeah, it's one of those things where if you've been listening and getting something out of it, that's the way to keep it going. No pressure, just if it's useful. We're grateful for everyone who's already part of that. Luna: Alright, back to the euro. One more thing I want to flag — the yen is weakening again, at 159.2 per dollar. That puts pressure on the euro indirectly, because a weaker yen makes Japanese exports more competitive against European goods. Lucas: That's a real headwind. But it also reinforces the safe-haven argument. If investors are fleeing yen weakness, where do they go? The dollar is strong but expensive. The euro offers yield and stability. I think we'll see more reserve managers thinking that way. Luna: And the yuan is at 6.79 per dollar, slightly stronger. So emerging market currencies are mixed. But the euro is the one holding steady. Lucas: Look, I'm not saying the euro is the new Swiss franc. But for the first time in years, it's behaving like a currency that investors trust during uncertainty. That's a big deal for the European project. Luna: It is. And it's a story we'll keep watching as the ECB meeting approaches and the energy situation evolves. Lucas: Absolutely. Thanks for listening, and we'll be back next time with another angle on the European economy.