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Friday, January 8, 1999 Published at 15:23 GMT

Flying start for the euro

Currency traders have got used to euro prices

Europe's new single currency, the euro, has had a dream start. The transition has gone smoothly, it has been accepted by bankers worldwide and already it is a force on the world's financial markets. But does this set it on course for a bright future?

The launch

One could see broad smiles in Frankfurt this week and there were sighs of relief at the European Central Bank (ECB) after the euro had taken the first three big hurdles:

  • Conversion
    European bankers had only three days - over the New Year weekend - to convert shares, currency holdings, government bonds and other assets into euros, but the number-crunching exercise was trouble-free.
  • Trading
    Asia's financial markets had the first bite at the euro, and some had worried that they might reject the new currency, setting the trend for the whole market. However, the euro started life in Sydney, Tokyo and Hong Kong with strong gains.
  • Settlement
    The international payment and settlement systems harboured the biggest potential for euro trouble. Doomsayers had predicted that millions of dollars, pounds and euros could be lost because of misdirected payments and failed trades, but banks reported only minor glitches.

[ image: Time to celebrate the euro?]
Time to celebrate the euro?
The euro has turned out to be a stable currency. On Friday one euro bought $1.1575 and 0.7098. This is below the dollar price set for the euro's launch on 1 January, although that is due mainly to the unexpected strength of the US economy. And the euro has gained some ground against the pound.

Bankers and politicians have given the euro the thumbs-up and are celebrating what has been a good launch - at least technically.

Euro boost for shares

Tim Huddart, Director of Global Research at Merrill Lynch, says the new currency has a "warm and cuddly feeling" about it. He is reluctant to speak of euro-phoria, but says the euro has triggered a lot of "enthusiasm" on stockmarkets worldwide.

Mr Huddart believes that international investors are now more aware of the European market place. As a result they have begun to shift assets into Euroland and he predicts that share prices of big well-known companies will benefit most. That could take the blue-chip indices of Europe's stock markets to new heights.

No volatility

[ image: Overall market volume is still low, but interbank trading in euros has been hefty]
Overall market volume is still low, but interbank trading in euros has been hefty
The currency markets are happy too. Ravi Bulchandani, Head of Global Currency Strategy at Morgan Stanley Dean Witter, confirms that the euro had a good start: "Given the monumental nature of the undertaking it has gone remarkably smoothly."

On the first day of trading the euro proved to be a strong currency and Mr Bulchandani says that it has a "pretty bright outlook".

He predicts massive portfolio shifts into the euro during the first half of the year, which could drive up the euro's value against the pound and the dollar.

Teething problems

However, Mr Bulchandani warns that there are two issues that could hold back the euro.

First there are the technical glitches. They have been few and far between. Luxembourg's central bank erroneously received payments from German banks meant for commercial banks in Luxembourg. In Finland some banks are still waiting to be paid, but the amounts are said to be insignificant.

[ image: Wim Duisenberg says the ECB has not intervened on the currency markets to stabilise the euro]
Wim Duisenberg says the ECB has not intervened on the currency markets to stabilise the euro
More worrying are market rumours about troubles with Target, the payment system set up by the European Central Bank. It seems to have difficulties coping with the huge amount of euros traded and the central banks of France and Spain are reported to have technical problems settling some transactions with the ECB.

The president of Europe's central bank, Wim Duisenberg, has dismissed the difficulties as "teething problems" caused by "human errors and sometimes human ignorance" and says they were much smaller than anticipated.

Ravi Bulchandani of Morgan Stanley confirms that there are "no systemic problems" and says: "My personal assessment is that the technical difficulties will be sorted out with relatively little serious impact." He believes that once all systems are running smoothly the big international investors will enter the eurozone market and begin active trading in euros.

Economic worries

More worrying for analysts, dealers and investors is the overall economic outlook for Euroland.

On Friday new unemployment figures from Germany confirmed that some of the eurozone's big economies could soon be in trouble again. One Berlin-based economic institute has sharply cut its growth prediction for Germany's economy.

[ image: The euro launch triggered a stock market rally in Europe]
The euro launch triggered a stock market rally in Europe
This would put the ECB on the spot. Its priority is "monetary stability", in other words low inflation. Lower interest rates might boost the economy, but could fuel inflation too. Mr Duisenberg says he does not "see any tendencies that could force us to change rates in the future".

Nonetheless, many analysts forecast that the ECB will cut interest rates to below 3% within the next six months to boost Europe's economy. That would undermine the euro's strength, with investors looking to buy other currencies offering a better return.

Tim Huddart of Merrill Lynch says that it will be interesting to see "whether the positive start can be maintained".

So is the euro a success? Its launch has certainly been a triumph, but all experts caution that it is too early to draw too many conclusions from the euro's strong performance during its first week of trading.

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