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Euro to battle dollar but no easy ride for baht

 

A HARD look at the euro currency, which will be introduced on Jan 1, shows that it will be as volatile against the baht as other major currencies and provide equal risks and opportunities for Thai businesses.

Speaking at a symposium on ''The Role of the Euro'', organised by the Bank of Thailand last week, Therapong Monthienvichienchai, regional head of foreign exchange and derivatives and private banking of Deutsche Bank AG, Singapore, said over the past five to six months the euro had been quoted at Bt41-Bt48.

He said this range reflected the volatility of the currency that is set to challenge the dominance of the US dollar and the Japanese yen.

''The euro is stable only when it is taken into account by the member European Union countries. But outside the EU membership, it carries high risk. So investors need to take extra caution,'' he said.

At present, there is no direct euro/baht quote on the trading screens in the banks' dealing rooms, neither is there any yen/baht quote. To arrive at the euro/baht rate, dealers will match the euro/US dollar rate with the dollar/baht rate before determining a crossing rate of the euro/baht. This computing technique is similarly applied with the yen/baht quote.

However, Therapong believed that the euro will have a good prospect of challenging the US dollar as the world's currency because it is likely to be a strong currency.

''We've got an impression that the euro is likely to be managed like the Deutschemark by the Bundesbank. This is because the European Central Bank, which will be independent from political pressure, will follow the model of the Bundesbank of Germany,'' he said.

It is difficult to paint a picture of the euro in the first six months of its existence because nobody knows about the portfolio adjustments of the European central banks and other international hedge funds.

But Tharit Panpiemraj, a senior official of the Bank of Thailand's banking department, believed that the euro will be a relatively stable currency in the first half of next year, making some gains against the dollar or the yen.

He added that the European Central Bank will try to create confidence in the euro for it to become an international currency and reserve currency of other central banks.

''Investors will have more confidence in the euro because the economy of Europe will achieve stability and low inflation,'' he said. ''Low inflation can guard the value of the currency. The European Central Bank is likely to bring inflation under control, targeting it at below 2 per cent.''

There will be room for the role of the euro to expand as the EU moves on to develop its capital market, whose size is about 75 per cent of the US market's, according to a Bank of Thailand report.

Moreover, most of the European capital markets are largely dominated by government bonds. The EU will attempt to use the euro as an international currency to do trade and investment with other European countries and the rest of the world, hence directly challenging the US dollar as the international currency.

US exports account for 13 per cent of the world's trade. The dollar is used as a medium for as much as 48 per cent of international transactions, the Bank of Thailand report shows. Central banks also keep as much as 57.1 per cent of their foreign exchange reserves in dollars.

The EU, together with Britain which is not among the launch countries of the euro, account for 31 per cent of world's exports and their currencies are used in 31 per cent of all international currency transactions.

But the popularity of their units as reserve currencies trails the dollar, accounting for a combined 17.8 per cent.

BY VATCHARA CHAROONSANTIKUL, THANONG KHANTHONG

 

 

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