Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: N who wrote (1122)	12/30/1998 11:20:00 PM
From: Karin	Read Replies (3) \| Respond to of 3536

I think the EMU could bring our market down. US giants prepare to storm Europe By BRIAN HALE, Herald Correspondent in New York The United States is heading optimistically into tomorrow, the day of the euro, with few apparent worries about the potential implications of European Monetary Union (EMU) for US financial markets and US policy. So far there seems to be little concern about the arrival of EMU and the world's most significant and controversial period of monetary development for decades. For the moment, the focus is on the gains from EMU rather than on what happens if the euro overtakes the US dollar as the world's pre-eminent currency. US banks are keenly awaiting the post-EMU opening of financial borders that will increase the European banks' domestic market to the size of the US market. The Europeans wanted to create a market that would put their banks on a more equal footing with US competitors, but US banks believe they will fare better because of their experience in a US-type market. Moreover, the US banks even seem to have done more than others to ready themselves for the new market. One study, by Meridien Research, found that US banks had spent proportionately more on strategic EMU projects than European banks while the European ones were focusing on more straightforward preparation. Some experts think this strategic focus will probably give the US banks crucial market share and position in the consolidating European banking environment at the expense of their less well-prepared European competitors and that Chase Manhattan, BankAmerica and Citigroup will storm Europe and radically change its competitive landscape. Chase Manhattan has already made clear its ambitions in Europe, and US investment banks such as JP Morgan are lining up behind the US commercial banks for services such as euro cash-clearing services. The US credit card companies also see the euro as a unique opportunity to boost their business in euroland, and financial service companies expect to be able to boost their trade finance business while helping US clients cope with the change. US securities firms also see opportunities in euroland because they expect EMU to encourage broader interest in share and bond markets and the development of an investment culture more akin to the US, with growing retail client interest in mutual funds and direct investment. Yet beneath all the glee at expanding markets, there is some acknowledgment that EMU and the euro could pose major problems for the US. Since the Bretton-Woods agreement of 1944, the US dollar has ruled supreme as the currency of last resort and the world's reserve currency - a role seen starkly in August and September when the world financial crisis reached a peak. The question now is whether the US dollar will be the currency of the strongest nation on the planet following the creation of a super-economic bloc that even without Britain and other countries will be larger than the US. Euroland is home to 290 million people (the US population is 267 million), accounts for 19.4 per cent of the world's gross domestic product compared with the US's 19.6 per cent, and provides an 18.6 per cent share of world trade compared with the US's 16.6 per cent. Even if the US dollar maintains the edge it had over the mark, which many doubt, EMU will inevitably hasten the US dollar's fading importance in the world. The euro is already emerging as the new anchor currency as the emerging nations of eastern Europe look towards it as the currency for their international trade, and a number of them seek ties to it. Similar developments are likely in Asia, where the ravages of last year's currency crisis were largely exacerbated by the heavy US dollar weightings of debt. China has already revealed plans to convert a large part of its $US141 billion ($231 billion) in foreign exchange reserves into the euro. Japan is also expected to feel pressure to reduce what is widely seen as an over-dependence on the US dollar. Closer to home, even banks like Bank Boston, which has expanded in Latin America instead of Europe, have been surprised to discover how many Latin American account-holders are asking for euro accounts instead of US dollar-denominated ones. Ironically, all this could hasten the end of the long bull market in the US sharemarket. Ever-rising share prices have been significantly helped by falling US Treasury bond yields, but non-US buyers now account for more than the net new issue of US bonds. Some experts have calculated that US bond yields would be at least a full 1 per cent higher without such strong overseas demand, and that the sharemarket would be unable to sustain its current high levels in a higher interest rate regime. If EMU prompts a speedier than expected shift from the US dollar to the euro there could be a sell-off in US bonds that would spark such a regime, but Wall Street experts are sanguine, even though simulations carried out by the IMF show that an optimal portfolio for central bank foreign exchange reserves on a risk/return basis has an almost equal amount of euros and US dollars. Karin