a

FWN: 055334 GMT

Analysts See Emu-out Currencies Little Affected by
Summit

(One of a series of stories ahead of the May 1-3 European
heads of government and finance ministers' meeting in
Brussels)

--Analysts divided on whether sterling's safe haven status
will intensify or diminish--
--Fears that overseas investment in U.K. firms will dry up
appear overdone--
--Little, if any, movement expected in Swiss franc, Swedish
krona, Danish krone--

By Jane Padgham
U.K. Economics Reporter

London-May 1-FWN--THE CURRENCIES OF EUROPEAN NATIONS
not participating in the European economic and monetary
union (EMU) first wave should be little affected by the
events of this weekend's euro summit in Brussels, according
to analysts here.
With the United Kingdom chairing this weekend's
meeting, and with London as Europe's premier financial
center, sterling is the most striking absentee from the
European single currency.
While the U.K. government is in favor of joining EMU in
principle, it has made it clear that it will only do so when
the economic benefits are "clear and unambiguous." As the
U.K. economy is currently not moving in tandem with those of
its European neighbors, most agree that it would be
disastrous for both Britain and EMU for it to join now.
The Bank of England has argued that the prospect of
Britain staying out of EMU for the foreseeable future has
been one of the factors behind sterling's rise. It maintains
that up to 20% of sterling's appreciation can be attributed
to its safe haven status, with the currency seen as an
attractive hedge against uncertainties over both the
strength of the euro and the sustainability of EMU. When the
first-wave EMU members and the bilateral conversion rates of
their currencies are announced at the weekend, sterling's
safe haven status will be undermined, the argument goes.
"It is very difficult to untangle the EMU effect from
the domestic causes of the appreciation, but I wouldn't say
it's as much as 20%," said Michael Lewis, senior currency
economist at Deutsche Morgan Grenfell. "Sterling should come
off a bit after the weekend, but we won't be embarking on a
period of sterling weakness like DM2.80. It's more domestic
economy inflation fears, particularly in the service sector,
that are providing a lift to the currency."
Peter Stoneham, currency analyst at Technical Data,
said he would be surprised to see any appreciable movement
in sterling as a result of this weekend's meeting.
"The single currency is very important for sterling,
but there's an awful lot of focus on domestic factors," he
said.

End of Part 1

(c) Copyright 1998 FWN

FWN: 055404 GMT

Emu-out Currencies Little Affected by Summmit, Pt
2

Stoneham also questioned the degree to which EMU is
surrounded by uncertainty. "We know the members that will go
in, and we know their bilateral conversion rates will be
close to their ERM (European exchange rate mechanism)
central parities. There remains a question mark over what
the ECB (European Central Bank) will do on interest rates,
but I'd be surprised if sterling kicked into action next
week," he said.
Chris Furness, senior market strategist at 4CAST,
argued that, if anything, sterling could strengthen after
this weekend.
"The safe haven flow argument is regarding whether the
euro will be strong or weak," he said. "We expect EMU to
include 11 countries including the Club Med countries
(Italy, Spain, Portugal) and so it will bring in economies
that could crack it all open. So sterling's safe haven
status should be enhanced over continued fears of a weak
euro and fears about the sustainability of the entire
project."
Furness pointed out that the future path of sterling
also depends largely on the monetary policy pursued by EMU
member central banks in the run-up to EMU's launch and the
ECB when it takes over the reins of setting interest rates.
Furness believes that interest rates in core Europe
will move by less and more slowly than the market expects,
helping to keep sterling underpinned for the rest of this
year. In fact, Furness said he would not be surprised to see
sterling test DM3.10 and DM3.15 again.
Looking further out, Furness sees the ECB hiking rates
by up to 100 basis points in 1999. "So sterling will remain
strong, and then start falling as euro-area interest rates
are increased next year," he said.
A further consideration for sterling is the degree to
which Britain's absence from EMU could dry up the
investments that have helped lift the U.K. economy over the
past decade.
Stoneham does not believe Britain will lose out in the
short term. "The U.K. is still a natural place to put money,
even with uncertainty over interest rates," he said.
Furness agreed, noting that 1997 saw $53.04 billion
worth of investment spent on overseas acquisition of U.K.
companies, a 35% increase on the previous year.
"'U.K. Limited' is doing very well at this time," he
said. "The scare stories about Britain remaining outside EMU
are overdone."
One factor which could undermine sterling, though, is
if the euro becomes a quasi-domestic currency in the United
Kingdom. British Steel and Imperial Chemical Industries have
already announced that they will ask their suppliers to
accept payment in euros. There have also been reports that
some large U.K. companies, which have European-oriented
businesses, have been discussing plans to switch their
operations directly into euros.

End of Part 2

(c) Copyright 1998 FWN

FWN: 055418 GMT

Emu-out Currencies Little Affected by Summmit, Pt
3

Lewis said the switch by U.K. companies to using euros
would intensify the pressure for sterling to join the single
currency, and would lead to sterling falling towards its
likely entry rate of around DM2.70.
Elsewhere, Switzerland seems unlikely to go into EMU
anytime soon. After seven years of slow growth, partly
caused by an uncompetitive currency, there's little prospect
of a pick-up.
"The economy's flat on its back with its legs in the
air," Furness said. "There's a weakening bias for the franc
as the authorities are quite happy to see it weaken. But
against this is the fact that, despite secrecy laws
encouraging more disclosure, there's still an awful lot of
Russian money flowing in."
On balance, analysts see EMU having little, if any,
impact on the Swiss franc, the Swedish krona or the Danish
krone.
"The Danish krone is very, very stable and doesn't draw
speculative flows," Stoneham said.
"The Swedish authorities have recently tried to talk up
their currency as the economy is starting to boom," Furness
said. "As far as EMU goes, there's a feeling that Sweden
will do whatever Britain does."
So come Monday morning, barring any major surprises at
this weekend's meeting, analysts expect little turmoil in
European currency markets, with EMU developments already
priced in.
"The next six months should actually see a reduction in
currency volatility as the EMU members' currencies converge
towards their central rates," Lewis said. "Monday's trade