Euro offers Asia an alternative to U.S. dollar

Euro offers Asia an alternative to U.S. dollar

By Yoshiko Mori

TOKYO (Reuters): Watch out, U.S. dollar! Asian investors have long been waiting for an alternative to the dollar as the key reserve currency, and monetary officials and economists say it could be the euro.

"The idea of a successful euro is intriguing for Asian nations as it means the freedom to shift a major part of their funds out of the U.S. dollar," said Masao Suzaki, professor of economics at Tokyo's Senshu University.

Asian investors already hold more than half of the world's reserves. But over the past few decades their concentrated investment in the volatile U.S. currency has lost them hundreds of billions of dollars.

Suzaki said both public and private investors would switch a major portion of their funds, now mostly parked in U.S. dollar assets, into the euro.

If the euro were to show strong liquidity and be firmly backed up by sound policies from the European central bank, investors would be attracted, he said.

A senior Japanese Ministry of Finance (MOF) official agreed. "If the euro gains the confidence of international investors as a key currency, that would be favorable for Asia in light of our needs to manage our reserves in liquid instruments, not just in dollar, and to divert currency risks," he told Reuters.

Europe used the recent Asia-Europe Meeting in Bangkok and the World Bank/IMF meeting in Hong Kong as an opportunity to showcase the euro as a reliable currency to Asian economies and future holders of the single European currency.

Bundesbank President Hans Tietmeyer, who attended the IMF meeting, said the euro, if it became a stable and internationally accepted currency as was hoped, would be added to the portfolios of global investors.

The depth and liquidity of the euro markets would make it more attractive than the German mark, the world's second largest reserve currency, he said.

Japan's Finance Minister Hiroshi Mitsuzuka told the IMF meeting he hoped the euro would become a strong currency in order to maintain stability with the yen and U.S. dollar.

Japan, which has the world's largest official foreign reserves at $225.569 billion, suffered a stunning 9.788 trillion yen ($81 billion) worth of currency losses due to the dollar's depreciation by the end of March, MOF said.

But a possible reshuffling in Asian investors' portfolios, which are now dominated by the dollar, could well send a shock to the world currency system, analysts say.

The foreign reserves of Asia-Pacific nations, including China and Australia but excluding Japan, stood at $488.2 billion at Dec. 30, 1996, compared with $497.6 billion held by the Group of Seven (G7) industrialized countries.

Reshuffling by major investors of their portfolios has in the past had a major impact on foreign exchange rates.

In April 1995, a move by Asian nations to reduce their U.S. dollar holdings helped drive down the dollar to a historical low of 79.75 yen.

"There will be a heated contest between the euro and dollar to take over as the key currency superpower in the early 21st century," said Suzaki.

U.S. economist Fred Bergsten has said a shift in the power balance would not take much time. "There is evidence from the history of major currencies that major shocks can produce rapid changes in portfolio composition," he said.

But others said it would take some time for Asian nations to catch up with the changing future power balance.

"The euro, if successfully launched, would quickly climb up the ladder to become a reserve currency. However, emerging Asian countries are unlikely to hop on the train," said Takeshi Ohta, chairman of the advisory council at Daiwa Research Institute Inc.

Ohta, a former director at the Bank of Japan, said Asian nations would be busy dealing with their domestic economic woes for the next two to three years in the aftermath of the region's currency crisis.

He added that the question of which countries would join in monetary union, particularly with Britain undecided, would be crucial to the success or failure of the euro.

If Britain, which has the world's largest corporate bond market, joins European Economic and Monetary Union (EMU) in 1999, it would greatly enhance the liquidity of the euro, he added.

Asian investors are also intrigued by the possibility of the euro becoming a key currency because the EMU's policy goals mark a contrast to that of the United States.

In the United States, non-inflationary, sustainable economic growth is the main policy target.

Meanwhile, Europe's Maastricht treaty sets the priority on achieving sustainable current account balance instead of growth. "The U.S. policy of emphasizing growth at the cost of everything else has allowed Washington to run massive fiscal and current account deficits with little official restraint," Suzaki said.

He said the United States has taken advantage of the dollar's status as the key global currency, printing unlimited dollars and relying on foreign investors to finance its debt.

Federal Reserve Chairman Alan Greenspan has said the cost of funding U.S. government debt is cut by $10 billion to $15 billion each year because foreigners are willing to hold large amounts of dollars.

But foreigners may no longer be willing to hold large amounts of dollars if they have alternatives, economists said.

"EMU policy stipulates that it will not abuse the key currency advantage even after the euro obtains global currency status," Suzaki said.