Euro offers Asia an alternative to U.S. dollar<\/p>\n
By Yoshiko Mori<\/p>\n
TOKYO (Reuters): Watch out, U.S. dollar! Asian investors have
\nlong been waiting for an alternative to the dollar as the key
\nreserve currency, and monetary officials and economists say it
\ncould be the euro.<\/p>\n
\"The idea of a successful euro is intriguing for Asian nations
\nas it means the freedom to shift a major part of their funds out
\nof the U.S. dollar,\" said Masao Suzaki, professor of economics at
\nTokyo's Senshu University.<\/p>\n
Asian investors already hold more than half of the world's
\nreserves. But over the past few decades their concentrated
\ninvestment in the volatile U.S. currency has lost them hundreds
\nof billions of dollars.<\/p>\n
Suzaki said both public and private investors would switch a
\nmajor portion of their funds, now mostly parked in U.S. dollar
\nassets, into the euro.<\/p>\n
If the euro were to show strong liquidity and be firmly backed
\nup by sound policies from the European central bank, investors
\nwould be attracted, he said.<\/p>\n
A senior Japanese Ministry of Finance (MOF) official agreed.
\n\"If the euro gains the confidence of international investors as a
\nkey currency, that would be favorable for Asia in light of our
\nneeds to manage our reserves in liquid instruments, not just in
\ndollar, and to divert currency risks,\" he told Reuters.<\/p>\n
Europe used the recent Asia-Europe Meeting in Bangkok and the
\nWorld Bank\/IMF meeting in Hong Kong as an opportunity to showcase
\nthe euro as a reliable currency to Asian economies and future
\nholders of the single European currency.<\/p>\n
Bundesbank President Hans Tietmeyer, who attended the IMF
\nmeeting, said the euro, if it became a stable and internationally
\naccepted currency as was hoped, would be added to the portfolios
\nof global investors.<\/p>\n
The depth and liquidity of the euro markets would make it more
\nattractive than the German mark, the world's second largest
\nreserve currency, he said.<\/p>\n
Japan's Finance Minister Hiroshi Mitsuzuka told the IMF
\nmeeting he hoped the euro would become a strong currency in order
\nto maintain stability with the yen and U.S. dollar.<\/p>\n
Japan, which has the world's largest official foreign reserves
\nat $225.569 billion, suffered a stunning 9.788 trillion yen ($81
\nbillion) worth of currency losses due to the dollar's
\ndepreciation by the end of March, MOF said.<\/p>\n
But a possible reshuffling in Asian investors' portfolios,
\nwhich are now dominated by the dollar, could well send a shock to
\nthe world currency system, analysts say.<\/p>\n
The foreign reserves of Asia-Pacific nations, including China
\nand Australia but excluding Japan, stood at $488.2 billion at
\nDec. 30, 1996, compared with $497.6 billion held by the Group of
\nSeven (G7) industrialized countries.<\/p>\n
Reshuffling by major investors of their portfolios has in the
\npast had a major impact on foreign exchange rates.<\/p>\n
In April 1995, a move by Asian nations to reduce their U.S.
\ndollar holdings helped drive down the dollar to a historical low
\nof 79.75 yen.<\/p>\n
\"There will be a heated contest between the euro and dollar to
\ntake over as the key currency superpower in the early 21st
\ncentury,\" said Suzaki.<\/p>\n
U.S. economist Fred Bergsten has said a shift in the power
\nbalance would not take much time. \"There is evidence from the
\nhistory of major currencies that major shocks can produce rapid
\nchanges in portfolio composition,\" he said.<\/p>\n
But others said it would take some time for Asian nations to
\ncatch up with the changing future power balance.<\/p>\n
\"The euro, if successfully launched, would quickly climb up
\nthe ladder to become a reserve currency. However, emerging Asian
\ncountries are unlikely to hop on the train,\" said Takeshi Ohta,
\nchairman of the advisory council at Daiwa Research Institute Inc.<\/p>\n
Ohta, a former director at the Bank of Japan, said Asian
\nnations would be busy dealing with their domestic economic woes
\nfor the next two to three years in the aftermath of the region's
\ncurrency crisis.<\/p>\n
He added that the question of which countries would join in
\nmonetary union, particularly with Britain undecided, would be
\ncrucial to the success or failure of the euro.<\/p>\n
If Britain, which has the world's largest corporate bond
\nmarket, joins European Economic and Monetary Union (EMU) in 1999,
\nit would greatly enhance the liquidity of the euro, he added.<\/p>\n
Asian investors are also intrigued by the possibility of the
\neuro becoming a key currency because the EMU's policy goals mark
\na contrast to that of the United States.<\/p>\n
In the United States, non-inflationary, sustainable economic
\ngrowth is the main policy target.<\/p>\n
Meanwhile, Europe's Maastricht treaty sets the priority on
\nachieving sustainable current account balance instead of growth.
\n\"The U.S. policy of emphasizing growth at the cost of everything
\nelse has allowed Washington to run massive fiscal and current
\naccount deficits with little official restraint,\" Suzaki said.<\/p>\n
He said the United States has taken advantage of the dollar's
\nstatus as the key global currency, printing unlimited dollars and
\nrelying on foreign investors to finance its debt.<\/p>\n
Federal Reserve Chairman Alan Greenspan has said the cost of
\nfunding U.S. government debt is cut by $10 billion to $15 billion
\neach year because foreigners are willing to hold large amounts of
\ndollars.<\/p>\n
But foreigners may no longer be willing to hold large amounts
\nof dollars if they have alternatives, economists said.<\/p>\n
\"EMU policy stipulates that it will not abuse the key currency
\nadvantage even after the euro obtains global currency status,\"
\nSuzaki said.<\/p>",
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