"Euro Could Dethrone The Dollar In Asia"
Although the economies of Asia remain shell-shocked, Asian countries still hold hundreds of billions of dollars in cash and could play a key role in determining the success of next year's major economic event; the creation of Europe's single currency, the euro, Jan. 1.
Europe's money also promises to play a much greater role in Asian finance.
While Indonesia, South Korea and Thailand have had to resort to International Monetary Fund bailouts, Asia remains the world's dominant lender, with well over $500 billion in foreign-currency reserves, most of them in U.S. dollars.
Japan, China, Hong Kong, Taiwan and other economies in Southeast Asia are financing America's continuous and growing current-account deficits.
That means Asia buys a lot of American bonds, but that could change. Asia holds a combined 40.5 percent of the world's foreign-currency reserves, and it is the possible movement of some of those reserves from dollars to euro next year that could have the biggest individual effect on how strong the euro turns out to be, analysts said. "The decision by Asian central banks is crucial -- it's key," said Lorenzo Codogno, economist at the Bank of America in London.
The United States has a 21 percent share of the world's economy. But the U.S. dollar mad up 56.4 percent of international reserves at the end of last year, according to the IMF. Reserves in European currencies -- including four that will not convert to the euro on Jan. 1 -- made up just 26 percent, even though Europe's contribution to the world economy is about equal to America's.
Should some of these imbalances get addressed after January, there is plenty at stake.
If the euro gains in value against the dollar, central banks would prove to be big buyers of bonds denominated in euro, analysts said. That could put serious pressure on the value of the dollar, because there would be lower demand for U.S. Treasury bonds and therefore less demand for buying dollars.
The dollar could then fall, bringing renewed inflationary pressure, which itself could reduce the likelihood of further cuts in U.S. interest rates next year. Of course, there would also be benefits to a cheaper dollar, which would tend to make American products more competitive on foreign markets and thus be likely to increase exports.
While they see it as a possibility, though, many analysts say they do not expect an overnight movement into the euro in the weeks after the debut of the euro Jan. 1, when individuals and businesses will be able to start using the euro for check, credit-card and financial transactions. The introduction of the physical currency will come two years later.
"Central banks in Asia tend to be much more conservative than their counterparts in Europe," said Ma Guonan, an economist at Salomon Smith Barney in Hong Kong. As a result, he said, they might decide to wait a few months to see how the euro fares before undertaking major shifts in their reserve currencies.
On Nov. 1, Leon Brittan, vice president of the EU Commission and one of a series of EU officials recently in China to help talk up the euro, said Beijing would convert a "serious amount" of its $141 billion in foreign-exchange reserves in 1999 from dollars to euro.
It is clear that in 1999 and beyond, Europe's money will play a greater role in Asian finance, as the European bloc begins trading in a currency that will be far more liquid than the individual European currencies are today. Governments in Asia, which today might not look closely at lending in Irish punts or Spanish pesetas, may well decide to buy Irish or Spanish bonds denominated in the same euro used by France and Germany.
As for companies and governments in Asia looking to issue new debt, "everybody's going to be looking to fund in the euro," said the head of origination at a European bank in Tokyo.
"The Japanese want to issue into the euro," he said. "Peope want to make use of this new megamarket."
The euro may start slowly, he said , but a few large issues from supranational agencies such as the World Bank could give a major lift to confidence in the currency.
In fact, it is the bond market that could lead the way for a shift of central bank reserves. The changeover may not come so much in the shift of cash but rather in purchases of euro-denominated bonds with proceeds of maturing dollar bonds, as well as with cash that is continuing to roll into central banks of Asian countries that are running current-account surpluses.
The United States is not the only country at risk in the event of a strong euro, however. Should the euro really take off, there is a danger that the much larger, more liquid capital market that results could suck investment into Europe at the expense of Asia, according to David Carse, deputy chief executive of the Hong Kong Monetary Authority.
"There must also be at least a possibility that closer integration of the EU could make it more self-contained and inward-looking," Mr. Carse said in a speech last week. "Intra-EU trade could increase, while that with the rest of the world and Hong Kong could diminish.
In the first four months of this year, he said, Japan sold a net $2.1 billion in stocks and bonds in Asia but bought $9.9 billion in European securities. If this trend continues, he said, "extended diversion of capital to Europe would undermine Asia's growth prospects as well as Hong Kong's position as an international financial center."
Japan has also been aware of the problems linked to a strong euro. On Sunday (November 15th), the chairman of Fuji Research Institute, Toru Kusukawa, said Asian countries should peg their currencies not primarily against the dollar, as has been the case for years, but to a three-tier basket of currencies made up of the dollar, the euro and the yen, according to Agence France-Presse.
Japan may also be waking up to the fact that a move away from dollar funding in the bond markets would give it an opportunity to increase the disproportionately tiny amount of yen-denominated debt in the world's reserves.
A government task force that advises the Japanese finance minister said recently that the government should consider eliminating a series of withholding taxes on Japanese government paper.
(International Herald Tribune, 18 November, 1998, by Philip Segal) |
