They will remain wary of buying European currencies until the continent's proposed single currency has proved itself a worthy successor to the mark.
"About 90 per cent of the increase in central banks' non- gold reserves in the final quarter of last year went into the US dollar, and there seems no doubt that part of this was due to a pre-EMU shift in reserves," said Kit Juckes, the currency strategist at NatWest Markets.
He is optimistic that demand will eventually switch back "but this is definitely not going to be the case on 1 January, 1999", the scheduled start date of the monetary union.
Joseph Yam, the chief executive of the Hong Kong Monetary Authority, said last week that the central bank has cut back the share of European currencies in its foreign exchange reserves. He said the HKMA holds 75 per cent of its reserves in dollars and 25 per cent in other currencies, not all of them European.
The HKMA is not the only institution to take precautions. Yam said Asian investors are also concerned about EMU and are cutting holdings of European securities and currencies.
"Asian and other monetary authorities are saying there is not enough clarity about how fiscal and monetary policy will be determined after EMU," said Avinash Persaud, the currency strategist at JP Morgan and Co.
Concern about the outlook for EMU has intensified since Germany, one of the primary architects of closer European integration, now seems unlikely to meet the deficit target for entry. The single currency could be delayed, or introduced without economic goals being achieved.
Signs that political will to introduce the euro on time will override economic arguments for a delay may spur these investors to dump marks and, later, weaken the single currency into which it will be subsumed.
Investors and central bankers said it would be hard to use looser interpretations of the entry rules to let Germany under the wire, then keep out countries with a poorer track record of economic and currency stability, such as Italy. In this case, the euro would likely be weaker and less stable than the mark.
"The turmoil we have seen in Europe in the last few days is compounding the uncertainty about EMU," said Brian Venables, a senior bond strategist at ABN Amro in Amsterdam. This will make Asian investors more conservative, he added, "making the dollar more attractive". Copyright: IOS & BloombergReuse content