Baring Asset Management doubts that the euro can stay strong given the imminent threat in the region and the UK firm has downgraded the currency to a strong underweight position.

The single currency has held up surprisingly well against the dollar in 2011 despite the eurozone’s sovereign debt problems. It is now at about the same level as at the start of the year, although it fell from a high of about $1.44 to $1.34 during the course of September (source: the European Central Bank).

When a German bond auction failed to sell more than 60 per cent of its target last week, the euro saw one of its worst falls in its history, but it has since stabilised. However, many commentators argued that the event demonstrated the importance of Germany for the euro’s future.

Barings does not believe that the situation will persist as it forecasts that recession in Europe will be a fact of life within weeks. As a result, the UK asset manager is not just pessimistic about the single currency, but also sees emerging European currencies as vulnerable.

“Sometime next year could be a great buying opportunity for risk assets, or earlier if Germany relents on ECB bond buying, but for now we want to keep our portfolio risk down to minimal levels,” said Percival Stanion, head of asset allocation at Barings.

Eastern European currencies have been largely swept along with a general risk-aversion. SEB, Sweden’s biggest bank, forecast in October that these currencies would decline somewhat further in the coming months before stabilising and gradually appreciating. Total depreciation will not be as marked as in 2008, the bank said.

The World Gold Council recommended recently investment in gold as an alternative to currencies which are suffering due to the debt load of their countries, not just the euro but also dollar and sterling, as well as constant printing of more paper money in this quantitative easing cycle. At about 1,750/oz, the price of gold is about $350/oz higher than at the start of the year.