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.