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Euro Seen Vulnerable as Blowback From Sanctions on Russia Bites

Aug. 4 (Bloomberg) -- European Union sanctions on Russia risk inadvertently denting the euro-area’s economic recovery and accelerating a decline in the currency, foreign-exchange strategists said.

Deteriorating trade relations with Russia led Barclays Plc economists to cut their forecast for euro-zone gross domestic product, while Royal Bank of Scotland Group Plc reiterated its forecast the euro will weaken as the sanctions take hold. Germany will suffer due to its close ties with the Russian economy, according to the Sentix institute.

“The euro area is going to underperform for a long time,” said Marvin Barth, head of European foreign-exchange strategy at Barclays in London. “Russian sanctions reinforce that picture and may increase the speed with which that happens.”

Russia’s continued support for separatists in eastern Ukraine has prompted the EU to impose restrictions on the operations of some banking and energy companies. That means Russia may do less business with the euro area, threatening to slow the 18-nation bloc’s economic recovery, which the European Central Bank is already striving to jumpstart through record-low interest rates and extraordinary stimulus measures.

RBS is keeping its forecast for the euro to decline amid “relatively larger economic blowback from sanctions on Russia,” the bank’s Singapore-based foreign-exchange strategist Greg Gibbs wrote in an e-mailed note today.

The euro weakened 1.8 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. It was little changed at $1.3419 as of 4:03 p.m. London time, down from a 19-month high of $1.3993 set on May 8.

‘Economic Engine’

Barclays lowered its euro-area GDP growth project by 0.1 percentage point to 0.9 percent for 2014, and cut its estimate for 2015 by 0.2 percentage point to 1.4 percent, according to a Aug. 1 investor note.

Daimler AG, the world’s third-biggest maker of luxury vehicles, foresees downward momentum in the company’s Russian business after it grew 20 percent in the first half of the year, Chief Executive Officer Dieter Zetsche said in an interview with Bild am Sonntag newspaper published Aug. 2.

The German economy significantly feels “the Russia-effect, due to the fact that the euro-area’s economic engine is closely tied to the Russian economy,” the Limburg, Germany-based Sentix institute said in a press release accompanying its euro-area sentiment index today. The index declined to 2.7 this month from 10.1 in July.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins

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