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To: Alex who wrote (25304)	1/3/1999 7:59:00 PM
From: goldsnow	Read Replies (2) \| Respond to of 116779

Euro arrival set to hasten eclipse of dollar era 02:46 p.m Jan 03, 1999 Eastern By Mike Dolan LONDON, Jan 3 (Reuters) - The arrival of a single European currency on Monday is widely expected to hasten the eclipse of the U.S. dollar as the world's undisputed currency of choice after more than 50 years. While debate rages about whether the dollar will be replaced by the euro as the world's biggest reserve currency, few deny the dollar's status is in decline. Of more than $1 trillion worth of foreign currency in reserve at central banks around the world, analysts reckon the dollar's share has fallen from more than two-thirds 20 years ago to just over half. Brushing aside fears over its durability and untested status, many argue the euro will erode dollar dominance further. ''In five years' time something like 30-40 percent of central bank reserves will be held in euros -- that will then be about level pegging with the dollar,'' said Avinash Persaud, head of currency research in Europe at U.S. investment bank J.P. Morgan. ''I wouldn't dismiss the idea that in 10 years the euro has replaced the dollar,'' said Persaud, who has been a long-time advocate of the euro assuming world reserve currency status. ''It's not strength, it's not geo-politics. It's the question -- is it cheap to transact in this currency?'' The first blow to dollar hegemony was the breakdown in the early 1970s of the Bretton Woods fixed exchange rate regime, a system which depended on the value of gold and the dollar as pegs for world currencies since the end of World War Two. The second and more significant punch to the dollar was the acceleration of European economic monetary integration and the start of Europe's exchange rate mechanism (ERM) in 1979. The ERM used the mark and euro's predecessor -- the European currency unit -- as linchpins. European central banks increased holdings of marks relative to dollars as a result. Now, with the arrival of the euro as a fully fledged currency of 11 European countries, central banks around the world are set to increase the share of euros in their reserves. If nothing else, they will need to do this to match the import and export activity of their domestic companies with the significant trading clout of companies in the euro bloc. China's central bank said last month it planned to adjust the mix of its reserves, more than $140 billion at present, by holding more euros at the expense of the dollar's share. It said dollars accounted for 62 percent of reserves and German marks represented 11 percent, but that this year the share of euros in reserves would be increased to 30 percent. Advocates argue the volume of trade in euros with the euro 11 countries -- a bigger exporting bloc than the United States -- will ensure euro transaction costs are as cheap for the dollar. Similarly, if a European and U.S. company were to compete for a contract in a third country such as China, there would now be a 50-50 chance of the deal being done in euros, analysts said. Previously, it was almost certain to have been in dollars. There may also be an effect on the way commodities like oil and gold are priced in dollars. Companies in the Middle East, for example, export in dollars but import in a range of European currencies and will increasingly be tempted to invoice oil exports in euros also. J.P. Morgan estimates the total shift out of dollars and into euros ultimatley could be as much as $750 billion to $1.0 trillion. The timing of this shift is the big uncertainty. Others are still sceptical. Peter Von Maydell, currency strategist at Credit Suisse First Boston, said he believed the euro's emergence as a truly global reserve currency was a long way off -- if only because of the inertia involved with technical changes and market custom. ''It probably takes two to three generations to change the denomination of transactions,'' he said. A good example, he said, was the protracted decline of sterling as a world reserve currency in the early part of this century. U.S. officials have acknowledged the importance of the euro but questioned whether that meant a loss in the dollar's role. ''The euro may not be the most important reserve currency but another important currency,'' said New York Federal Reserve President William McDonough late last year. ((London newsroom +44 171 542 6784, fax +44 171 542 5285)) Copyright 1999 Reuters Limited.