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To: Alex who wrote (23924)	12/7/1998 9:35:00 PM
From: goldsnow	Read Replies (1) \| Respond to of 116764

Full story FEATURE-Currency dealers see uncertain euro start 01:02 a.m. Dec 07, 1998 Eastern By Andrew Reierson LONDON, Dec 7 (Reuters) - The arrival of Europe's single currency may fulfil a dream for many of the continent's politicians, but for currency dealers gearing up for the launch, the euro is far from welcome. Traders say a smooth transition to dealing in the new unit is extremely uncertain, even at this late stage. Potential headaches range from managing the euro alongside the so-called legacy currencies it replaces to the reliability of dealing room trading systems and getting to grips with the fundamental economic issues that will move the euro. ''A lot of people don't know an awful lot about what is happening. Some people people believe the mark ceases to exist on the first of January, other people believe it is illegal to trade dollar/mark on the first of January. That is simply not the case,'' said one dealer at a U.S. bank who declined to be named. Perceptions of how the market will adapt to the euro when trading kicks off on January 4 vary widely from dealing room to dealing room. The only certainty, it seems, is the uncertainty of how it will trade. Politicians have tried to smooth the transition to the euro by allowing legacy currencies such as the mark and the Spanish peseta to continue to exist alongside the euro until July 1, 2002, at the latest. COMPLICATIONS AND OPPORTUNITIES This will make life complicated for traders who are still not sure of the extent to which legacy currencies will continue to trade after January 1. But it may also present opportunities. ''In a slow market, if euro/dollar quotes widen out and you can access a spread that's cheaper by using dollar/mark, then people will continue using dollar/mark,'' said the U.S. bank dealer. ''You'll quickly learn that if you ask for a euro/dollar price and get made a five-point spread, that's the equivalent of an eight-point dollar/mark price, which, these days, is just not acceptable.'' But even here there is no consensus. Some dealers see rich potential for arbitrage opportunities, but others say these trades are too impractical to contemplate, especially if, as some anticipate, legacy currency bid-ask spreads expand. ''A wider spread in the legacy currencies will probably prevent any real potential arbitrage,'' said one senior dealer at a major European bank in London. ''There may be a few split seconds if you want to chance it, but trying to arbitrage just for the sake of a point or two -- I don't think people are going to bother.'' However, there is wide agreement that trade in dollar/mark is not going to go away any time soon. Much of this will be from people choosing to settle forward contracts due after December 31 in legacy terms and then convert the proceeds into euros, say dealers. But a lot of legacy business will be down to customers still uncomfortable with trading and settling in the new currency. ''There are probably a lot of customers that still haven't got their head around the whole idea of the euro,'' said the European bank dealer. ''There will be demand for the euro, but quoted in legacy currency terms -- which could cause a lot of confusion.'' For the interbank forex dealing community, quoting the new currency is a small hurdle. After months of systems testing and dry dealing runs, most of the big trading houses are as familiar as they can be with a currency that does not yet exist. HEADACHES MAY ARISE But headaches may arise as banks tailor the standard interbank dollars-per-euro quote to what the customer prefers to deal in -- a problematic yet necessary task in an increasingly customer-driven market. Whether this conversion is to euros-per-dollar or eiros-per-sterling, as is the current quoting convention, or a conversion to a legacy currency, the potential pitfalls are dramatic if a bank's dealing system is not up to the task. ''We're going to have a trader doing sterling/euro and a trader doing euro/sterling,'' said David Mead, assistant director foreign exchange at NatWest Global Financial Markets. ''There is room for error and we're going to try to keep that to an absolute minimum.'' Dealers acknowledge these conversion gymnastics will be an administrative nightmare, and are expecting the inevitable paper chase to track down misrouted payments. But these factors, as well as the initial distrust in what their new euro dealing systems are telling them, will make even veteran foreign exchange dealers pause for a second before they commit themselves to quoting a price. ''Being long $100 million of dollar/mark is nerve-racking enough in today's market -- but being long $10 million (in the euro/dollar market) on January 4 will be 10 times worse,'' said the European bank dealer. While individual banks' confidence in their preparations to deal in euros is high, traders admit early activity will be tentative at best, and trades small, until a market consensus is reached as to what the ''right'' price of euros will be. Some see this process taking a few days while others say it will be at least a month before the euro can be priced confidently. ''There are a lot of people who say this is going to be huge thing. Well, it is going to be a huge thing, but not on January 4,'' said the U.S. bank dealer. Copyright 1998 Reuters Limited