European Central Bank (ECB) President Mario Draghi.

European Central Bank (ECB) president Mario Draghi may prove too successful at bolstering confidence in the 17-nation euro.

The euro has climbed against 30 of its 31 most-traded peers since Draghi said in July last year that he would do “whatever it takes” to save the currency, and futures trading in Chicago show hedge funds do not expect a reversal. Foreign investors are returning to markets they deserted in 2012, buying more than 60 percent of the e6 billion (R70bn) of bonds Italy sold this week.

While Draghi’s decisions are placing such luminaries as former International Monetary Fund chief economist Kenneth Rogoff on the wrong side of speculation that the currency union is headed for a breakup, the euro’s strength threatens to delay a recovery. Recent gains have left it “dangerously high”, according to Jean-Claude Juncker, who leads a group of euro zone finance ministers, and Deutsche Bank and Goldman Sachs see more strength.

“It is a bit of a double-edged sword,” Kiran Kowshik at BNP Paribas in London said this week. “With what Draghi has done, it’s very difficult to stop a stronger euro. Capital flows are returning to the euro zone and we think that’s going to continue.”

The euro rose to $1.3404 on Monday, the strongest level since February 29, 2012. It also touched ¥120.13, its strongest level against the Japanese currency since May 4, 2011. On Thursday it appreciated to its highest level in more than a year against the Swiss franc and rose to the strongest in nine months versus the pound.

BNP Paribas forecasts the euro will climb to $1.35 by the end of March, while Goldman Sachs predicts it will strengthen to $1.40 in 12 months. Last year’s low was $1.2043 on July 24.

“We’ve seen strong capital inflows in the euro area,” Draghi said in Frankfurt on January 10 as the ECB kept its main refinancing rate at a record low 0.75 percent. “The deposits in periphery banks have gone up. There is a positive contagion.”

Juncker, Luxembourg’s prime minister, said on Tuesday that a “dangerously high” currency would make it harder to turn the economy around because it would make exports more expensive. The comments made him the first policymaker to label the export-crimping effect of the currency’s rise as a more pressing concern than the three-year debt crisis.

Demand for the euro was further bolstered last week when Draghi said ECB policymakers did not consider cutting interest rates at their most recent policy meeting.

“Draghi doesn’t seem to be too worried about currency strength,” Henrik Gullberg, a foreign exchange strategist at Deutsche Bank in London, said on Wednesday.

Deutsche Bank forecast the euro would advance to $1.37 in the second quarter, Gullberg said.

Hedge funds betting on the currency’s drop have largely capitulated. The difference in the number of wagers by large speculators on a decline versus the dollar compared with those on a gain was 8 035 contracts on January 8, versus last year’s average net short position of 114 000, according to the Washington-based Commodity Futures Trading Commission. Traders had a net long position on January 1 for the first time since August 2011.

Europe’s central bank is shoring up its currency just as its peers around the world debase theirs to boost growth. The push for weaker currencies intensified after Japan’s Prime Minister Shinzo Abe began calls for aggressive action to weaken the yen. As countries try to boost exports, they risk hurting the competitiveness of others and provoking retaliation.

The leading economies were on the brink of a “currency war”, Bank Rossii first deputy chairman Alexei Ulyukayev said at a conference in Moscow on Wednesday. “Japan is weakening the yen and other countries may follow.”

The yen fell versus all of its 16 major peers on Thursday after Economy Minister Akira Amari said his comments earlier this week that excessive weakening of the yen was harmful had been misinterpreted.

While Juncker bemoaned the strength of the euro, Draghi said last week that the currency was not a policy target and cited a commitment from the Group of 20 nations to move toward a market-determined exchange rate system.

“Other central banks are continuing to be aggressive and the ECB traditionally has been more conservative, so that adds up to a higher euro,” Gullberg said.

Gains in Spanish and Italian bonds are another indication Draghi has scattered speculators with a bearish outlook on the euro, or those that expect asset prices will decline.

Meanwhile, Rogoff now credits ECB moves for the rising confidence in the euro, saying the central bank had “played its hand… well”.

“For the moment, it has also taken some of the worst possible outcomes off the table,” he said on Wednesday. “But all the ECB’s efforts will come to naught if the political leaders of the euro zone do not find a way forward to genuine fiscal, banking and, especially, political union.” – Neal Armstrong and Emma Charlton from Bloomberg