Buying Euro, Australian Dollar Is a `Value Trap,' Barclays Says

By Candice Zachariahs

Nov. 11 (Bloomberg) -- The euro and Australian dollar may weaken further, after record slides in October, as concern builds that the world is headed for a prolonged recession, Barclays Capital said.

The euro dropped 9.7 percent against the dollar and 16 percent versus the yen last month, the biggest declines since it was introduced in 1999. The Australian dollar, or Aussie as it is known, tumbled 18 percent against the greenback and 22 percent versus the yen, the most since it started trading freely in 1983.

``Investors need to be careful not to fall into the `value trap,''' David Woo, global head of currency strategy in London at Barclays Capital, wrote in a research report dated yesterday. Currency pairs including the euro-yen, euro-dollar and Aussie- Swiss franc could experience further declines, he wrote, if markets' outlook of a ``relatively benign outcome'' is incorrect.

The International Monetary Fund last week slashed its 2009 global economic growth forecast to 2.2 percent, and warned of the first simultaneous recessions in the U.S., Japan and Europe in the post-World War II era. Asian and European equities rallied yesterday as investors speculated a $586 billion stimulus package in China, the biggest contributor to global expansion, would spur growth worldwide.

The euro slid to $1.2689 as of 10:33 a.m. in Tokyo from $1.2748 late yesterday in New York. It weakened to 124.08 yen from 124.95 yen. Australia's currency dropped 0.5 percent to 66.66 U.S. cents and 0.7 percent to 65.19 yen.

Carry Trades

Barclays forecasts that the euro will weaken to $1.24 and 117.8 yen over the next three months, and the Aussie will slide to 60 U.S. cents. The bank is the world's third-biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.

The euro and the Aussie weakened against both the dollar and the yen in each of the past three months as mounting concern about the economic slump prompted investors to cut so-called carry trades, investments in higher-yielding overseas assets funded in nations with low interest rates.

Benchmark rates are 3.25 percent in Europe and 5.25 percent in Australia, compared with 1 percent in the U.S., 0.3 percent in Japan and 2 percent in Switzerland. The risk of carry trades is that currency moves will erase profits.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net