Euro May Gain 16% as China Demand Drives Up Oil, Barclays Says

By Candice Zachariahs

Nov. 21 (Bloomberg) -- The euro may strengthen 16 percent against the dollar in the next 12 months as Chinese demand drives up prices for oil, reducing the U.S. currency's attractiveness, Barclays Capital said.

Two-thirds of the euro's 22 percent slide since the July peak of $1.6038 can be accounted for by plunging oil prices, Barclays said. Crude oil may rebound after dropping 67 percent from a record $147.27 a barrel touched July 11 as the economy expands in China, the world's second-largest oil consumer after the U.S., Barclays said.

``Contrary to current received wisdom, oil prices are much more important for the euro-dollar than either the stock market or interest-rate differential right now,'' wrote London-based David Woo, global head of currency strategy in London at Barclays Capital, in a research report yesterday.

Declining oil prices have helped the greenback by narrowing the U.S. current-account deficit, reducing the U.S.'s need for overseas funding, Woo said. Lower oil prices may also have helped the greenback by reducing the amount of dollars oil exporters receive and then sell for euros, according to Barclays.

Woo forecasts the euro will trade at $1.24 in three months and $1.45 over 12 months as accelerating growth in China helps oil prices ``retrace their recent fall.''

The euro slid 1.2 percent this week to $1.2459 as of 12:30 p.m. in Tokyo, from $1.2605 on Nov. 14. Over the past 52 weeks, a 10 percent decline in oil prices led to a 1.5 percent appreciation in the dollar, according to Woo's calculations.

China announced a $586 billion package to prop up its economy on Nov. 10. Merrill Lynch & Co. estimates the package would add 3 percentage point a year to China's expansion, spurring growth to 8.6 percent in 2009 and 8.5 percent in 2010.

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