Euro set for best quarter in four years

The euro was on the cusp of its best quarterly rise in more than four years, underlining the single currency’s resilience in the face of the Greek crisis and nagging concerns about global economic growth.

With the second quarter ending on Tuesday, the euro was heading for an increase of around 4 per cent against the US dollar.

In the third quarter of 2013, it rose 4.1 per cent, the best three-month period since the first quarter of 2011 when it climbed 5.8 per cent.

The robust performance of the single currency comes as the eurozone economy has shown signs of improvement since the European Central Bank’s quantitative easing programme started in March. Meanwhile, the dollar’s strong run has lost steam as investors remain unsure when the Federal Reserve will start increasing overnight borrowing costs.

The euro has also remained resilient and experienced modest losses this week after Greece imposed capital controls and closed its banks ahead of a referendum on Sunday that could pave the way for the country leaving the eurozone.

Research from Deutsche Bank concluded that the risk of contagion from a potential Greek default and exit from the euro (Grexit) is much less grave than the last round of brinkmanship four years ago.

Mark Wall, Deutsche’s chief economist, said: “Private sector direct exposure to Greece is much smaller. The euro-area in general, and the other peripherals, are in a stronger position.

“The economy is in a recovery phase, albeit modest, and the current accounts of peripheral countries are in positive territory. Macroeconomic fundamentals suggest less of a basis for contagion.”

But Koon Chow, macro economics and foreign exchange strategist at Union Bancaire Privée, warned investors not to become complacent about Greece, particularly if the country votes No in Sunday’s referendum.

“At the very least one should expect a period of heightened market volatility, which could be especially intense because global fixed income markets have become decreasingly liquid. The sharp rally and sell-off in Bunds earlier this year, is a great example of this,” he said.

While the euro’s resilience has been the standout factor in the market, and one of the main talking points during the Athens imbroglio, investors remain willing to look past the political risk factors inherent in the crisis and toward the euro’s appeal as the funding currency in a carry trade.

This tactic involves borrowing in a lower yielding currency to fund bets laid in higher yielding assets. With the ECB still engaged in economic stimulus while the US Federal Reserve is looking to raise rates, the euro’s carry trade appeal sheds light on its bright showing this quarter.

“The euro provides a fairly natural, albeit highly volatile, funding currency,” said Simon Derrick, chief market strategist at BNY Mellon. “It could also be argued that investors had looked at the evidence over the weekend and had decided that the potential for a Grexit was actually low.

The euro was lower against most of its peers on Tuesday, the last trading for the second quarter, a time when investors tend to hedge their currency exposure.

But Greece news was a dominant factor in the euro’s performance on Tuesday. With the hours ticking down to Greece defaulting on €1.6bn loan repayment to the International Monetary Fund, the Greek government put forward new proposals involving a fresh bailout.

The euro ranged up and down a cent, but by the close of the European session was 0.8 per cent lower on the day.

Japan’s yen has been performing well against the euro as well as other currencies, which traders say is gaining status as a haven currency. The yen has gained nearly 3 per cent against the dollar in the past three weeks.

Taking into account the sharp drop during the first three months of 2015, the euro is likely to end the first half of the year down about 8 per cent against the dollar.