Euro may challenge 'dollar dominance'

JAKARTA (JP): The European Monetary Union (EMU)'s new currency could challenge the dominance of the U.S. dollar, a European economist said.

Chief Economist of Germany's Deutsche Bank Group, Norbert Walter, said here yesterday the proposed European single currency called euro would shift the world's orientation away from the United States dollar.

"The establishment of euro will create a new regime outside of the U.S. dollar, which will alter the close relationship between other currencies such as those in Asia with the U.S. dollar," Walter said at a press conference.

"This will reduce the exchange rate volatility to the currencies," he said.

The euro, which was expected to gain strength in 2005, would affect financial institutions around the world, he said.

He expected the currency reserves held in euro would reach 30 percent by 2005, compared to the current reserves in the European currencies of about 20 percent.

He estimated the world's currency reserves held in the U.S. dollar would be 50 percent in 2005, down from 60 percent at present.

The European Monetary Union is set to begin the first phase of the currency changeover to euro in early May next year, by selecting its member states and establishing the European Central Bank (ECB).

On Jan. 4, 1999, EMU will begin fixing conversion rates and ECB will conduct transactions in euro, but the changeover will not be completed until the end of 2001.

Germany, France, the Netherlands, Austria, Belgium, Luxembourg, Ireland and Finland had agreed to become founding members of the European Monetary Union, he said.

Portugal and Spain were possible candidates, while Sweden, Denmark, and the United Kingdom were so far not willing to participate. Greece did not fit the criteria, he said.

The conversion would probably be based on the EMU's Exchange Rate Mechanism at the time of the changeover, he said.

The probability the changeover to euro would work was about two-thirds, he said.

Walter said a single currency for European countries would boost the bilateral trade relationship between Europe and Southeast Asia.

"If you have a foothold on one of the countries in the EMU, you'll have a foothold on all European countries," he said. (das)