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Transition Countries And The D-Mark - A Marriage O

FRANKFURT: Investors and central bankers love the D-Mark. The German currency is second only to the US dollar as a reserve currency: 15% of the world's foreign exchange reserves are in D-Mark (dollar: 57%). It is also a sought-after investment currency: Non-German investors hold about 20% of domestic German bonds and 1.300 bn in D-Mark assets.

Eastern Europeans are as fond of the D-Mark. Their central banks thought to overweigh the D-Mark as a reserve currency. German banknotes are as popular. The Bundesbank estimates that around 35% of D-Mark notes are circulating outside Germany, much of it in Eastern Europe.

Given Germany's size and proximity this is no surprise. Germany is the most important trading partner for many East European and NIS countries. The D-Mark's popularity is underpinned by its reputation as a hard currency. Since the inception of the D-Mark in 1948, German inflation has never averaged more than roughly 3%. Consequently, foreign investors often find themselves rewarded with exchange rate gains.

International recognition of the D-Mark is a mixed blessing. The Bundesbank worries about the consequences of the international use of the D-Mark for its monetary policy and for the exchange rate.