Euro's debut helpful to Asian currencies

Euro's debut helpful to Asian currencies

SINGAPORE (AFP): Europe's new single currency will make its international debut in Asia on Monday, but analysts say trading will hinge on the greenback's strength.

The regional currencies were poised to enjoy some strength against the dollar with the introduction of the euro on Jan. 1, but Asian governments want currency stability to maintain export competitiveness, they said.

Philip Wee, regional treasury economist with Standard Chartered Bank in Singapore, said the strong euro, a fusion of 11 European currencies into a single money, could drag down the U.S. dollar with Asian currencies benefiting by default.

He said a higher euro against the dollar would strengthen the yen against the greenback and lend support to the other Asian currencies.

Since late last year, the yen has set the direction of most Asian currencies, which plunged against the dollar following the mid-1997 currency crisis.

The yen began setting the pace for other Asian units especially from October when U.S. hedge funds faced financial difficulties and were forced to unload dollars to repay yen loans, pulling the Japanese currency to a 16-month high.

The yen appreciated by about 13 percent against the greenback in 1998.

"Most Asian authorities, whose currencies have regained quite a bit of strength in the second half of 1998, will favor a more stable exchange rate against the U.S. dollar at this point," Wee said.

He predicted that Asian central banks would enter the market to ensure that their currencies did not appreciate rapidly to guard the region's competitiveness in exports, regarded as the key to reviving their recession-hit economies.

Europe is seen as a crucial market for Asia's export recovery, and lower-valued Asian currencies can make the region's exports more competitive.

The South Korean central bank already acted last month to cushion the won's rapid rise against the dollar.

"The dollar is still the interventionist currency," Wee said.

Financiers expect the first real test of the euro on Monday after the New Year's break, although the new currency was quoted in Bombay on Friday, the date of the currency's official launch.

Charles Wheeler, capital markets analyst at US research house Standard and Poor's MMS in Singapore, said he expected thin turnover against the euro in Asia on Monday until European trading began.

Asian trading mostly ends at about 0900 GMT to 0930 GMT, an hour or so after the opening of European trading.

"I think there will be very little activity until Europe comes in," said Wheeler, who forecast that in the first month of the euro's life, it would strengthen to 1.22-1.23 against the dollar.

The euro was set at 1.16675 to the U.S. dollar by European Union finance ministers on New Year's Eve.

"There is under-representation of European currencies in reserve holdings and with the advent of the euro, perhaps some central banks in Asia will reallocate their reserves," Wheeler said.

Apart from balancing their reserves, Asia would also face greater demand for euros and decreased demand for dollars in the medium term as transaction costs in Europe will be denominated in the new currency, he said.

Steve Brice, another regional treasury economist with Standard Chartered Bank, said the euro had been forecast to appreciate against most Asian currencies in 1999.

Brice said that based on his bank's forecast, the euro could appreciate from 139 yen in the first quarter of 1999 to 143 in the third quarter, 2.02 Singapore dollars to 2.16, from 41.7 Thai baht to 41.8, 50.3 Philippine pesos to 52.3, 4.66 Malaysian ringgit to 4.97 and 1,537 Korean won to 1625.

During the same period, the euro could rise from 10.44 Chinese yuan to 10.84, 40.5 Taiwan dollars to 40.7 and 9.77 Hong Kong dollar to 10.1.