By Katherine Ryder, contributor
FORTUNE — Every week for the past three months, headlines in financial newspapers have announced that the eurozone is on the brink of disaster. The casualties, thus far, include the leaders of Italy and Greece; Dexia, the French-Belgian bank, and most recently MF Global, the American brokerage. Despite last week’s coordinated actions by central banks to free up transatlantic capital, some analysts still forecast a calamitous outcome. Standard and Poor’s move to put 15 eurozone countries on notice for a possible debt downgrade doesn’t help.
Perhaps the most surprising aspect of the crisis is the fact that it has not prompted the euro, the currency that holds the continent together, to fall significantly against the U.S. dollar and British pound, its closest international counterparts. On November 21, research from Credit Suisse said that the euro is entering “its last days as we currently know it.” Yet the euro currently trades at $1.34 against the dollar, which is roughly where it was trading in 2007, and not far off from where it was at the beginning of this year.
There are several explanations for this resilience. The most obvious is a lack of good alternatives to the euro. Near-zero interest rates in the U.S. make dollar investments unprofitable, so large pension funds and other reserve funds that must diversify their portfolio can’t put all their assets in dollar-denominated investments. The American and British governments have their own debt problems, too, and this has kept investors duly wary.
Meanwhile, interventions by the Swiss and Japanese governments to prevent the franc and yen from rising have taken those respective currencies out of the trading game. “The eurozone is one part of the sovereign debt market where investors can still get yield,” says one FX trader, “and these investments are propping up the currency.”
Another theory is that investors are merely shifting most euro investments to the region’s fiscally healthiest countries, like Germany and the Netherlands, but haven’t on balance moved much money out of the euro. Last week, German one-year bond yields turned negative for the first time on record, as panicked investors put their money in what they perceived as the safest haven, amid rumors that the euro was about the unravel.
China may also be playing a part in the resilience of the euro. Concerned about its disproportionate dollar holdings, Beijing for some time has tried to diversify into whatever other asset classes it can get its hands on. Research from Standard Chartered says that during 2011, China has been attempting to shift its accumulation of new foreign currency reserves from dollars to euros.
A final factor that may have helped prop up the euro over the past year is a measure of blind confidence that European politicians won’t be stupid enough to let the euro fail. Though the past month marked a significant erosion of confidence on this front — investors recently turned the other way at auctions of ten-year Belgian, French, and German bonds — last week’s equity rally suggests that many people still think that all will end well. All eyes are on Friday’s EU summit, which analysts say could be one of the last, best opportunities to save the euro.
What’s next for the euro
It’s hard to have perspective in the midst of a storm, but one thing is for certain: everyone is a bear right now when it comes to the eurozone. The die-hard bears believe that the eurozone’s structural and political problems are too big to solve and that the euro will suddenly dissolve in the next few weeks. Less dramatic bears think that after a few recessionary years, Italy, Spain, and Greece will exit the euro, leaving the stronger countries bound together. The more optimistic bears hope that the European Central Bank will step up and buy up bad debt from Spain and Italy, which will allow politicians to negotiate their treaties and change statutes to bring Europe fiscally and thus ideologically closer together, with Germany at the helm.
In a way, a tighter fiscal union would represent the euro coming full-circle: from its origins as a political union, to a more narrowly defined monetary one, and back to a political union. This is a frightening prospect for the region’s smaller states, which fear an erosion of sovereignty. Yet it is likely needed now if the region is to retain its common currency.
As for the resilient euro, its near-term future will likely hinge on the strength with which ECB leaders declare their willingness to act now. A firm commitment, traders say, could keep the currency within its five-year trading band. Empty rhetoric, on the other hand, could cause it to finally crater.
