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. Last Updated: 07/27/2016

Euro Radiates Greenback's Glow

FRANKFURT, Germany -- Its leaders are divided and its economies are distressed, but Europe stands tall in one respect. The euro, its toddler currency, is growing into a cheeky rival to the dollar, one of the most visible symbols of the United States' power in the world.

After a hapless debut in January 1999, marked by a long, stomach-churning slide in its value, the euro has made up virtually all the ground it lost against the dollar. It now trades at an exchange rate of about $1.15 per euro, only 3 cents shy of its value on the first day of trading.

More important, the euro has gained stature as a safe haven for investors and governments.

The dollar remains the world's default currency -- the lingua franca of oil traders and bond dealers, and the bedrock of foreign reserves held by central banks from Brussels to Baghdad. But the euro is gaining ground, both as an attractive currency in which to issue bonds and as an alternative to the dollar for national foreign exchange reserves, notably in southeast Asian countries with predominantly Muslim populations.

With the United States piling up vast deficits, economists say the euro has a chance to consolidate its gains. "U.S. federal finances are coming under increased strain," said Niall Ferguson, a senior research fellow at Oxford. "Money that had been invested in dollar-denominated assets is shifting to euro assets. For the euro to become a little brother to the dollar seems perfectly plausible."

Such a role would vindicate the guardians of the euro, who watch over it from the European Central Bank's glass-and-steel tower in Frankfurt. They have always had grand ambitions for the currency, viewing it as an alternative to the dollar and an instrument to drive Europe's integration.

Yet an almighty euro carries risks for champions of a united Europe. It could supply fresh ammunition to opponents of the monetary union in Britain, Sweden and prospective members. It could also open fissures between existing members that depend on exports and stand to suffer from a currency that rises too far, too fast. Last week, three euro countries -- Germany, Italy and the Netherlands -- reported that they were on the brink of recession.

"If it goes much beyond $1.25, we've got a problem," said Daniel Gros, director of the Center for European Policy Studies, a research group in Brussels.

The introduction of euro notes and coins here last year was striking for how smooth the process seemed. After a noisy buildup, the Deutsche mark, the French franc and the Italian lira faded into history like quaint relics. In the financial markets, where the euro had traded as a virtual currency since 1999, the transition was equally seamless, with investors showing prompt acceptance of the new currency.

The shift toward euros is most pronounced in the global bond market. From 1995 to 1999, according to Ferguson's research, 53 percent of all corporate bonds were issued in dollars, and only 20 percent in the currencies of the 12 European countries that now use the euro.

In the four years since the common currency began trading, however, 44 percent of new global bonds have been issued in euros, nearly equaling the 48 percent issued in dollars. There is also anecdotal evidence that central banks, especially in some Asian countries, are beginning to diversify their reserves, to reduce dependence on the dollar. Bank Indonesia, the nation's central bank, has increased its holdings of euros, currency traders said.

"We are strongly tied to the dollar," Rizal Ramli, the former finance minister of Indonesia, said in an interview. "But with the dollar's decline, it is wise for Indonesia to diversify its reserves into euros."

In Malaysia, Prime Minister Mahathir Mohamad recently suggested that the state oil company, Petronas, switch to euros from dollars for its oil trading. His rationale, he said, was purely economic. "The U.S. dollar has depreciated by 25 percent," he said in opening a new Petronas natural gas plant. "In other words, we are earning 25 percent less."

Ramli played down the politics, noting the yield on euro-denominated assets is better than on dollars. If that were to change, he said, even Muslim countries would quickly switch back.