Euro May Be Resurfacing as a Safe Haven

Currency Is Bucking Old Trend of Wilting Amid Headwinds

By TOMMY STUBBINGTON

Updated Feb. 3, 2014 3:11 p.m. ET

LONDON—Over the past few years, the euro has been a barometer of risk: When the markets got cloudy, it fell. But in recent weeks, that relationship has changed, leading some analysts to wonder whether Europe, after years of crisis, is becoming a haven again.

When emerging markets took a steep fall in the past few weeks, dragging global assets with them, the euro shrugged it off. On some days, the currency has even managed to rally while stocks are crashing—a tendency usually associated with the Japanese yen or the U.S. dollar.

"Normally you would expect it to fall [in times of stress], but it does seem to be acting like the yen and the dollar and rising in bouts of nerves now," said Kiran Kowshik, a currencies analyst at BNP Paribas.

Monday, most major equity markets in Europe fell by more than 1%. The euro climbed against the dollar and pound.

The re-emergence of the euro as a haven would be welcome news for a continent that barely two years ago faced a crisis so pervasive that the survival of the currency appeared threatened. But at the same time, it poses challenges for policy makers: If the markets remain stormy, keeping the euro strong, the region's exports become more expensive, threatening a fragile recovery.

The euro's relative strength is likely to factor into the European Central Bank's thinking as it considers how loose or tight the bloc's monetary policy should be. The ECB's governing board meets Thursday.

For several years, the euro had been tied to investors' feelings about taking risks. Analysts at HSBC developed a mathematical model that measures the relationship between moves in individual assets and the general risk sentiment in financial markets as a whole. For more than five years, the euro was positively correlated with risk: When investors pursued riskier bets, it rose. When they got nervous, it fell.

In December, though, the euro moved into negative territory on HSBC's scale. Since then, it has bounced around zero—implying that broader swings in appetite for risk have no consistent impact one way or the other on the euro.

The chief driver of the change has been the euro zone's large and growing current-account surplus—a broad measure of trade—analysts at BNP Paribas say. The surplus has several effects. For one, it means steady demand for euros: The euro zone is exporting more than it is importing. The current-account surplus in November widened to €23.5 billion, the highest ever.

The ECB's low interest rates also makes loans in euros attractive. Overseas borrowers can use them to fund riskier, high-yielding investments elsewhere, much as investors have long funded investments with ultracheap borrowing in Japanese yen.

Those borrowings act as a sort of cushion in times of stress. If investors unwind risky bets, they repay their euro loans—buying the currency in order to do so.

BNP's analysts think the likelihood of further monetary-policy easing from the ECB—while the U.S. unwinds its own stimulus—will further enhance the appeal of the euro as a funding currency, meaning it would strengthen in times of market stress, pushing its risk correlation further into negative territory.

The backdrop to the current shift is the almost complete disappearance of the euro zone's debt crisis from investors' horizons, which has further bolstered the safety appeal of the euro.

Yields on some of the bloc's riskiest bonds sank to multiyear lows early this year—even as a storm raged in the emerging world.

"The euro zone is pretty much shielded from what's going on in emerging markets," said Yannick Naud, a portfolio manager at Sturgeon Capital, which manages $270 million of assets.

Mr. Naud remains comfortable holding on to formerly risky euro-zone assets—such as Portuguese government and corporate debt—during the current global selloff.

Still, not everyone is convinced that the euro will continue to act increasingly like currencies such as the yen.

"The euro may lose some its safe-haven appeal if peripheral markets become more susceptible to external shocks to market confidence," said analysts at Citigroup.

Inflated valuations for euro-zone assets, uncertainty about the ECB's next moves in fighting low inflation and regulatory concerns for banks could all increase the vulnerability of the currency bloc once more, they said.

Write to Tommy Stubbington at tommy.stubbington@wsj.com