Why we like European currencies right now: Goldman
"The improvement in growth is broad-based and we expect gross domestic product to stabilize in France, Italy and Spain by end-2013. We continue to see easy financial conditions as a support to domestic demand in the core and the pickup in global growth as a support for exports more broadly," it said in a note Thursday.
"Given the ongoing healing after the euro-area crisis, more upside growth revisions are likely and should contribute further to already strong capital inflows. Reserve diversification flows have the potential to further amplify these trends," Goldman said.
Goldman expects the euro to buy $1.40 in about six months, compared with the current level around $1.38, while it forecasts sterling to buy around $1.69 in six months, compared with around $1.62 now. Against the Swiss franc, it expects the euro to buy $1.28 in six months, compared with around $1.23 currently.
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While U.S. economic growth has accelerated, it hasn't translated into strength in the U.S. dollar, as the currency faces its largest net outflow since at least 1995, it noted.
"When looking at the direction of these portfolio outflows, Europe is clearly the main beneficiary, which is consistent with the upward revision to consensus growth expectations in the U.K. and the euro-area," it said. "The current account also remains in large surplus," it said.
In addition, the U.S. government shutdown hurt confidence in the dollar's reserve currency status, Goldman noted. In 2009, central banks in Brazil, Russia, India and China, or BRIC, markets had started reducing their allocation to the U.S. dollar and diversifying into the euro, the Australian dollar and the Canadian dollar, but this move out of the U.S. dollar was halted by the euro-zone crisis, it noted.
(Read more: Sell US, buy European assets: Strategist)
"Now may be the time to revive the old 2009 plan and sell the U.S. dollar for euro at a time when the outlook for the euro-zone improves," it said.
Political tension on the continent has also turned more muted as issues such as the Cyprus banking crisis and Italian elections have given way to more stability, while progress on important structural reforms, such as a European banking union, has helped rebuild market confidence, it said.
In the equity markets, Goldman is neutral on Europe on a three-month horizon, but overweight on a 12-month one.
(Read more: Is the euro the next currency battleground?)
"European risks now look smaller, but the market has also outperformed over the past few months and U.S. risks have declined as well," it said, but added it remained "very attractive" over the next 12 months.
"Margins have seen a significant cyclical decline, but started to expand on a trailing 12-month basis in the second-quarter earnings season. From here, we expect a rebound in margins to drive good earnings growth and performance. "
— By CNBC's Leslie Shaffer. Follow her on Twitter: @LeslieShaffer1