Countdown To The Euro: Euro expected to displace dollar

THE EUROPEAN single currency is expected to appreciate by as much as 10 per cent against the US dollar in its first year of operation. Central banks, especially in Asia and Latin America, will take the first opportunity for decades to diversify reserves by selling dollars and switching reserves into euros, although European interest rates are below US levels.

A report from the Centre for Economics and Business Research due later this week claims that China alone has more than $100bn in its reserves and is already on record as wanting to switch to a bi-polar reserve policy. Japan, the world's biggest holder of dollars, might also diversify into euros. It has suffered recurring heavy exchange rate losses over the years as the dollar has depreciated against the yen.

The euro could also appreciate against the pound, creating a window for the UK to join the European single currency at a lower and more realistic rate than the current 70p - and give UK exporters one final shot in the arm before currencies are fixed permanently.

Upward pressure on the euro as central bankers buy the currency will increase deflationary pressures on European economies, though, as the rising exchange rate prices EU producers out of world markets.