European currency may alter Asian forex policies

European currency may alter Asian forex policies

HONG KONG (Reuter): Changes in world economies and the advent of a single European currency will change the way Asian countries evaluate currency policy, said Bronwyn Curtis, head of currency research at Deutsche Morgan Grenfell in London.

The creation of a single currency in Europe "will force countries to re-evaluate exchange rate policies", Curtis said at a Deutsche Bank seminar in Hong Kong last week. She added that the move will have a profound effect on the U.S. dollar.

At present, 25 currencies are pegged to the dollar and many more follow it closely, said Curtis. In addition, 14 currencies are attached to the French franc and nine track the German mark.

European economic and monetary union (EMU) is scheduled to start on Jan. 1, 1999.

After the change, the U.S. dollar will remain the largest reserve currency, but about 20 percent of the world's foreign exchange will be in euros, Curtis said.

The adjustment in global central bank reserves is likely to have a dampening effect on the dollar, which in turn would affect dollar-based currencies.

At the same time countries with a dollar peg will be re- orienting more toward Europe.

"One currency, one interest rate, all controlled by the European central bank, means there will be one bank that will effectively be running monetary policy over a huge portion of the world," said Curtis.

Other factors also will affect currency management in Asia, notably the growing importance of the yen in Asian economies and the decreasing relevance of a dollar peg for most countries.

The peg made sense when the U.S. and Southeast Asian countries were growing in tandem but the argument in favor of fixed rates has less potency now that the two have decoupled.

"If the dollar continues to appreciate it may mean that the anchor needs changing," said Curtis. A strong dollar has hurt Asia's export-oriented economies and has encouraged huge capital inflows into the dollar-peg nations.

"We think the inflexible exchange rates are no longer the optimal way to run exchange rates in Southeast Asia," said Curtis. Already, there is some weak evidence that the dollar's importance in the region's currency baskets has declined and that trend is likely to continue, she said.

In the near term, Curtis said she expects the dollar to edge higher, rising to 115 yen and 155 marks in the next few weeks.

But the dollar should ease in the medium term, Curtis said. She noted that Japan's trade surplus with the United States has been creeping up again, while relative growth rates should favor the mark against the dollar in coming months.

She sees the dollar at 152 marks by year-end and 147 marks six months from now. Dollar/yen should ease to 105 to 110 over the next six months and "perhaps to 100 over the longer period".

Curtis also predicted that none of the Japanese, German nor U.S. monetary authorities will raise interest rates in the first half of 1997.