Euro, Franc, Krona to Benefit From Oil, Barclays Says
Currencies in Europe will benefit from record oil prices because of the region's energy efficiency, exports to oil-producing nations and vigilance against inflation, according to Barclays Capital.
The euro, the British pound, the Swiss franc, the Swedish krona and the Norwegian krone should perform “relatively well'' as oil prices rise, wrote David Woo, global head of foreign exchange strategy in London at the bank, the third-biggest currency trader. The U.S. dollar ranks bottom in terms of potential performance as energy prices climb, it said.
“Europe is well positioned in the new paradigm, the U.S. is not,'' Woo wrote in a research note dated May 23.
The dollar slid as much as 8.9 percent to a record low against the euro this year as losses from the subprime mortgage collapse threatened to send the U.S. economy into a recession. At the same time, oil futures have soared to a record as a crude producers sought higher dollar prices to compensate for lower import revenues, according to Barclays Capital.
This has created a “vicious circle'' where high energy prices increase the U.S. trade deficit and make other central banks reluctant to lower interest rates, leading to further dollar declines, Barclays Capital said.
The euro bought $1.5757 at 5:23 p.m. in Tokyo, little changed from late in New York on May 23. It rose to $1.6019 on April 22, the highest since the common European currency's introduction in January 1999. The euro will rise to $1.59 in the next three months, according to Barclays Capital forecasts.
Energy Efficient
The U.S., Canadian, New Zealand and Australian score poorly in terms of their intensity of energy use because of their dispersed populations and focus on manufacturing or commodity industries, Barclays said. European economies are more densely populated, service-orientated and energy efficient, it said.
Oil consumption accounts for less than 2 percent of nominal gross domestic product in Norway, Switzerland, the U.K. and Sweden in 2006, compared with more than 3.5 percent in the U.S. and Canada, the report showed.
“The U.S. is the world's third-largest oil producer but because of the high energy intensity of its economy, its petroleum trade deficit is not much smaller than the eurozone, which produces no oil,'' Woo wrote payday advance. Japan and Switzerland may also suffer deteriorating trade balances as oil prices rise, the report said.
Inflation Targeting
The European Central Bank's formal inflation targeting makes it less likely to have a “dovish stance'' than the U.S. Federal Reserve or the Bank of Japan as oil prices fuel inflation, he wrote.
Crude oil for July delivery rose by 96 cents to $133.15 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It reached $135.09 on May 22, the highest since trading began in 1983. The euro-dollar's correlation with crude futures in New York over the past year is 0.95 according to Bloomberg calculations. A reading of 1 means two variables move in lockstep.
“There is some positive correlation between the euro and oil,'' said Hiroaki Hoshi, who overseas the equivalent of around $6 billion as a senior fund manager at Daiwa Asset Management Co. in Tokyo. “The euro's strength isn't just a reflection of oil, it's also a reflection of the weakness in the dollar.''
The euro's gains are likely to be capped at $1.60, he said.
Norway's Oil
The euro may not rise much further because high oil prices will eventually hurt growth in the economies that use the common currency, according to Kensuke Niihara, head of foreign-exchange management in Japan at State Street Global Advisors, which manages $100 billion in assets worldwide.
Norway's currency is likely to rise in tandem with oil because the nation is the world's fifth-largest oil exporter, Niihara said. Sweden's currency may also benefit from its trade ties with Norway, he said.
“The euro cannot stay at current levels,'' Niihara said. “We're seeing a slowdown in European economic fundamentals. With Norway, the argument is simpler because of the high correlation with oil.''
Against the dollar, the Norwegian krone's correlation with Brent crude futures was 0.89 in the past year, according to Bloomberg calculations.
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