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(Clarifies that Howe was foreign minister when he resigned)
By Guy Faulconbridge
LONDON, July 22 (Reuters) - If there is a symbol of Britishambivalence to Europe then it may be the euro itself.
The capital of euro trading prospers outside the euro zone,but London's dominance of the $5.3 trillion-a-day foreignexchange market could wane if Britain left the European Union.
While British leaders have long resisted replacing poundswith euros, traders in the City of London financial centre nowbuy and sell more than twice as many euros as the whole19-member euro zone and more dollars than the United States.
For four decades, London has been the undisputed king offoreign exchange, but some investors fear that if British votersdecide to leave the EU, the City would eventually lose its topposition, especially in euro trading.
"If the UK left the European Union, London's dominance offoreign exchange including euro trading would gradually declineand then end as the flows moved to Asia and other Europeancapitals," U.S. investor Jim Rogers, who co-founded the QuantumFund in 1973 with George Soros, told Reuters.
"London's dominance of the foreign exchange market evolvedhistorically but evolution will continue in other places if theUK leaves. It would be foolish to leave the EU, but politicianshave done foolish things since the beginning of time."
Twelve years after Rogers left Quantum in 1980, Soros usedthe fund to bet successfully that sterling was overvaluedagainst the Deutsche Mark, culminating in Britain's biggestfinancial humiliation since the sterling crisis of 1976.
On so called 'Black Wednesday', Sept. 16, 1992, PrimeMinister John Major was forced to pull sterling out of theEuropean Exchange Rate Mechanism (ERM), which had been intendedto reduce exchange rate fluctuations ahead of monetary union.
Fast forward two decades: European efforts to forge anenduring monetary union are at the centre of a debate within theLondon elite about post-imperial Britain's place in Europe andwhether it might not be worth striking out alone.
The shadow of the euro falls across Prime Minister DavidCameron's attempt to renegotiate Britain's relationship withEurope, then hold a referendum on membership by the end of 2017.
'KING OF FOREX'
Sold sedately for centuries at the Royal Exchange oppositethe Bank of England, foreign exchange is now traded at highspeed among mostly foreign banks such as Citi, DeutscheBank, Barclays, JPMorgan and UBS.
London accounts for 41 percent of global foreign exchangeturnover, more than double the nearest competitor, New York,according to the Bank for International Settlements. London'sclosest European competitors are Switzerland and Paris, whicheach take about 3 percent of global foreign exchange turnover.
Yet London wasn't always king of forex: The hegemony of thepound sterling in the British empire meant that before 1914,London played second fiddle in forex to Paris, Vienna, Berlinand New York.
And London's rise was partly due to good fortune.
As the centre for global dollar trading, it benefited fromthe greenback's rise. The growth of international banking duringthe 1950s and 1960s put it in pole position to benefit from theforeign exchange trading boom when floating exchange rates wereadopted in the early 1970s.
Since UK exchange controls were scrapped in 1979, London hasthrived as a centre for everything from foreign exchange andbonds to derivatives and fund management, making it the largestnet exporter of financial services in the world.
By the end of that decade Britain was top, and its dominancehas strengthened ever since. Though the euro's introductionreduced the number of currencies traded, London emerged as theglobal centre for the most traded currency pair, EUR/USD.
"If Britain left the EU, that trade is gone," said onesenior European diplomat, waving his hand. "The first thingBerlin and Paris would do is to sit down and say: 'How do webring that business back?'"
'TREASURE ISLAND'
London offers by far the deepest pool of capital in the timezone between Asia and the United States, but also a feast forthe global merchant: property rights, a small army of lawyersand accountants, luxury property and shopping, quality privateeducation and a wider cultural renaissance unmatched in Europe.
To be sure, London's trading cables and wider pull, combinedwith institutional inertia, mean that any shift to the continentafter a so-called "Brexit" would be gradual.
"The wires that make the trading of FX electronic are all inLondon and so a quick move from the UK to Europe would requireinfrastructure spending," said Robert Savage, the CEO of CCTrack Solutions, a New York-based hedge fund with $100 millionunder management.
But over the longer term, he sees foreign exchange tradingmoving away from London and Europe if Britain leaves the EU.
"The volume of business in FX is likely to shift from the EUand UK to the U.S. and Asia," Savage said. "Big picture, theflow of capital is the driver of FX markets and the Asiancentres are on the rise."
Britain's allies say leaving the world's biggest tradingbloc would be foolhardy, leaving London's financial powerhousesubject to rules it would no longer influence and turning itinto an insignificant offshore 'Treasure Island'.
Opponents of the EU say London would thrive outside. Theynote that doomsters cried wolf in the 1990s, warning that Londonwould wither as a financial centre if Britain didn't dumpsterling and join the euro. That did not come to pass.
For Eurosceptics, the five-year euro zone debt crisis andGreece's near bankruptcy are evidence of a flawed monetary unionthat is doomed unless it integrates more deeply, a step thatwould consign Britain to the sidelines.
"REMORSELESS LOGIC"
Cameron had a front row seat for Black Wednesday as a25-year-old adviser to Britain's then finance minister, NormanLamont. He has promised to keep Britain out of the euro forever,and few British voters would countenance dropping sterling.
That leaves Britain firmly outside the increasinglyinfluential 19-nation euro zone core of the broader 28-memberEU. Greece's fate was determined by Germany and France, notBritain, which has refused to contribute to any fresh bailout.
Cameron is now set on defending the City from what hisfinance minister calls the 'remorseless logic' of euro zoneintegration.
"We, almost alone among the non-euro members, have nocommitment to join the single currency - and no realisticprospect of wanting to do so," that most powerful minister,George Osborne, told London financiers last month.
Osborne, who is Cameron's heir apparent, said Britain wants"fairness between the euro-ins and the euro-outs enshrined, andthe integrity of the single market preserved".
Euro zone rules must not hurt British interests, he said.
The government's worry is that Britain may eventually be oneof the only EU members outside the euro. It can already beoutvoted on regulatory issues by the euro zone if all 19 membersvote together as a bloc, which they rarely do.
The risk was underlined by an attempt by the EuropeanCentral Bank to force clearing houses for major euro assets torelocate from London to the euro zone.
Britain challenged the ECB, and the EU's Luxembourg-basedGeneral Court ruled in March that the central bank did not havethe 'competence' to impose such a requirement. Things might lookdifferent if Britain were no longer an EU member.
"LEFT BEHIND"?
Since joining the European Economic Community in 1973,British leaders have repeatedly underestimated the politicalwill for European monetary union that led to the birth of theeuro on the stroke of midnight heralding 1999.
When the Berlin Wall fell in 1989, Margaret Thatcher opposedthe French idea that a common currency was the best way totether a united Germany to Europe, though she eventually signedBritain up to the ERM in October 1990.
She was deposed the following month, after her foreignminister, Geoffrey Howe, resigned with a stark warning thatBritain risked being "left behind" on monetary union.
Thatcher's successor, Major, declared "game, set and matchfor Britain" after securing the right to opt out of a singlecurrency at the 1991 Maastricht summit - less than a year beforeBlack Wednesday.
When Tony Blair won the 1997 election, his finance minister,Gordon Brown, effectively ruled out euro entry by setting outfive economic tests that had been worked out with his top aide,Ed Balls, in a New York taxi.
How long Britain can sustain its balancing act of profitingfrom euro trading while staying out of the currency may dependon the outcome of Cameron's referendum. (Editing by Paul Taylor)
