Bloomberg News

Euro Rebound May Provide Better Selling Level, Barclays Says

December 09, 2011

Dec. 8 (Bloomberg) -- A near-term euro rebound may provide a more attractive level to sell the currency as it is poised to slide in 2012 with the European Central Bank forecast to cut interest rates further to combat the region’s recession, according to Barclays Plc.

“Our highest-conviction trade is to be short the euro,” said Jose Wynne, head of North America foreign-exchange research at Barclays Capital, during a news briefing in New York today. A short position is a bet an asset will decline in value.

The 17-nation currency will depreciate 10 percent versus the dollar during the next 12 months to $1.20, after rallying to $1.35 during the next month, Wynne said. The euro will fall to 96 yen, from the current 104 level during the next year, Barclays forecast.

ECB President Mario Draghi reduced the benchmark rate by a quarter-percentage point to 1 percent, matching a record low and offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to stem the region’s debt crisis. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans.

Euro Falls

The euro reached the lowest level this month versus the greenback, falling 0.5 percent to $1.3345 at 4:20 p.m. New York time.

With European leaders meeting in Brussels, Draghi repeated his call for them to make a “fiscal compact” to solve the regions sovereign-debt crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy are proposing to amend European treaties to tighten controls on budgets. Leaders are also mulling a plan that would channel central bank loans through the International Monetary Fund to fight the debt crisis.

“If there is any positive solution this weekend, we expect the euro to strengthen,” Wynne said. “But that will be a short- term reaction and we will be looking for an opportunity to sell it.”

Barclays’ economists said the euro area has already fallen into a recession, and forecast the ECB will cut its main policy rate to 0.5 percent and its discount rate to zero during the first quarter. Meanwhile, U.S. economy growth will be 2.5 percent in the fourth quarter, and 2.5 percent in 2012, they said.

“The ECB will continue to cut interest rates and continue to provide liquidity,” and that will pressure the euro in 2012, Wynne said. “We have to see economic activity stabilize before our clients will feel comfortable with that risk” of owning the euro.

--Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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