S-EA may move some reserves to euro

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Singapore Business Time (22 November 1997)
FRANKFURT

S-EA may move some reserves to euro
Turmoil will probably make Asian central bankers reassess position: GIC
official 

C 

ENTRAL banks in South-east Asia, seeking a better haven from the currency
market turmoil, may switch some reserves from US dollars into Europe's
future single currency, a senior manager of Singapore's long-term
government reserves said. 

In remarks to the European Banking Congress, Ng Kok Song, deputy managing
director of the Government of Singapore Investment Corporation, suggested
the euro may be the currency Asian banks choose when they switch their
reserves. 

"This significant change in currency regimes in Asia can conceivably
bring in its wake a greater disposition by Asian central banks to
diversify their foreign reserves from their current predominant holdings
of US dollars," Mr Ng said. 

The Government of Singapore Investment Corporation manages Singapore's
long-term foreign reserves. The dollar accounts for 60 per cent of the
world's currency reserves, the Deutschemark 14 per cent and the Japanese
yen, 6 per cent. Speculation has intensified over possible shifts in
central bank reserves when a European common currency is launched for
inter-bank business on Jan 1, 1999. 

Recent turmoil in South-east Asian financial markets has caused
currencies in the region, such as the Thai baht and the South Korean won,
to plummet against the US dollar and several nations have abandoned their
previous exchange rate targets to the US currency. That turbulence will
probably cause Asian central banks to reassess their reserves positions,
Mr Ng said. 

While the Japanese yen is also an alternative reserve currency to the
dollar, Mr Ng predicted that a move into the yen "will be relatively slow
and limited" with low interest rates and weak economic growth deterring
investors. 

"I think the euro has the potential to capture a larger share of Asian
central bank reserves than would be implied by European-Asian trade and
investment patterns," Mr Ng said. 

Supporting the euro's chances of competing with the dollar as an
international currency is "the emergence of an integrated and liquid
euro-denominated capital market, particularly in government debt," Mr Ng
said. If the UK participated in the currency union, this market would be
even more attractive for investors, he added. 

The euro will only vie with the dollar as a reserve currency if it can
prove its credibility as a strong and stable currency, Mr Ng said. Risks
to the euro's credibility "arise from longer-term considerations," he
said. 

"To the Asian observer, the main risk to the euro lies in the high and
secularly rising rate of unemployment in Europe, and the deep-seated
political and structural factors that underlie this phenomenon," Mr Ng
said. 

Another concern to Asian investors is that the exchange rate of the euro
"may be subject to greater volatility", Mr Ng said. -- Bloomberg