HONG KONG Asian currencies The focus of global currency movements has shifted from Washington and the dollar to the relationship between the euro and East Asian currencies. Two crucial trends have emerged. The first is Europe's belated recognition that the relationship of the euro to Asian currencies is as important as its position vis-à-vis the U.S. dollar. The European Central Bank may have neither the will nor the means for direct intervention in currency markets, but European companies have more to lose from the euro's strength against Asian currencies than against the dollar. Asian companies, and particularly Japanese and South Korean ones, compete more directly with their European than with their American counterparts. Other strong currencies such as the Australian and Canadian dollars have been commodity-price driven, so the strain of global currency and trade adjustment has been falling largely on Europe. Fortunately for Europe, the second trend is that some in Asia have woken up to fact that a strong currency is not necessarily a bad thing. Indeed some voices now accept it not just as inevitable but as positively beneficial for economies long overdependent on export volume. The leader in this has not been Japan, as one might hope, but South Korea, where a weak currency was causing a return of inflation and doing nothing to stimulate feeble consumer demand. To general surprise, a country long associated with mercantilist trade and currency policies has seen the light and allowed its currency to rise. In two months the won has gained 9 percent against the dollar and 4 percent against the yen. From a European perspective, however, there is still a long way for Asia to go to share the burden of global adjustment. Although Asia's current-account surpluses dwarf those of the euro zone, the won is still 15 percent and the yen 10 percent weaker against the euro than it was two years ago. Indeed, Europe's current-account surplus has barely changed as the U.S. deficit has risen dramatically. Asia traded its way out of the 1997 financial crisis default through devaluation and a surge in exports, especially to the United States. Now it is time to reverse the process. The key to further currency movement is probably China. It is a guessing game whether Beijing will allow the yuan to rise - which would likely set off another round of rises for the yen, the won and other Asian currencies - or whether it will wait until market forces and covert diplomatic pressure have driven the yen and other currencies up another 15 percent or so, at which point the inflationary cost to China of not following the currencies of its leading import suppliers would be high. Meanwhile Europeans have reason to suspect that Asian central banks had been major players in driving up the euro while resisting appreciation themselves. A crucial but little noticed paradox of the past two years has been that the strength of the euro has coincided with a sharp fall in euro-zone foreign reserves. This suggests that Asian central banks had not just been shifting reserves into euros but had been covertly buying euro-zone bonds through commercial banks. Meanwhile, lower euro reserves limit Europe's ability to undertake some covert intervention of its own to force up Asian currencies. Whatever has happened in the recent past, it is crucial that Europe and East Asia establish a currency modus vivendi. Without it, the global adjustment needed to bring the U.S. deficit down to sustainable levels will be accompanied by some very nasty trade frictions between Europe and Asia.