WITH the European monetary system in chaos and Germany facing its worst recession since World War II, investors are flocking to the US dollar. Last Thursday's devaluation of the Spanish peseta and Portuguese escudo cast a further shadow over the stability of European currencies. The devaluations emphasised the deep split between the ''hard core'' of strong, stable currencies in Germany, France, Belgium, The Netherlands, Luxembourg and Denmark, and the currencies of the remaining community members, none of which have the economicor political fortitude to sustain their currency values, much less move toward a single currency, which is the goal of the European Community. Even with stability in the core currencies, however, the turmoil among the weaker currencies and the reluctance of Britain to rejoin the monetary system any time soon, mean it will be difficult for the European Community to make much headway toward the Maastricht treaty's goal of a single currency and a centrally developed monetary policy by the end of the decade. Analysts say that, despite the slow recovery of the US economy, investors see the US dollar as the best safety net around. The dollar had an added boost last week with US retail sales for April rising 1.2 per cent, along with a 0.4 per cent rise in the consumer price index - the highest rise in three months. The inflation jitters that rippled through financial markets also benefitted the dollar. Higher inflation makes it less likely that the Federal Reserve will lower interest rates in the near future, as lower rates would make dollar-denominated investments less attractive. The dollar posted its biggest gains last week against the British pound on speculation that Britain might be the next government to lower rates. However, the German mark declined only slightly against the dollar because the Spanish rate cut seemed to diminish some of the urgency for Germany's central bank to lower its interest rates. The dollar continues to trade within a narrow range against the deutschemark, failing to break above the crucial psychological level of 1.6200 marks. Analysts predict that the German central bank will continue to guide rates lower with two cuts before the summer break, bringing the discount rate down to 6.5 per cent, although the poor state of the German economy could have the final say. Of the Asian currencies, strong overseas interest is being shown in the Malaysian ringgit. The ringgit has strengthened considerably in recent months despite the US$3.6 billion loss the Bank Negara incurred on reserves. According to Chase Manhattan's latest Asian Currency Update, the trend appears to be bullish as the market shifts its focus to economic fundamentals. Malaysia's economy is one of the strongest in Asia and is expected to grow at 7.5 to eight per cent this year. Another factor supporting the ringgit is Malaysia's central bank, which believes that a higher ringgit is still favourable and has, in effect, lowered the country's foreign debt. According to Chase, demand for the ringgit will strengthen this month, when Malaysian stocks are included in the Morgan Stanley Capital International (MSCI) World Index, which is widely used by fund managers as a benchmark for their international equity portfolios. Of the other Asian currencies, the Chase report said: ''The Singapore dollar is expected to hold firm against the US dollar. Healthy economic fundamentals and investor confidence will continue to support the strength of the Singapore dollar. ''The Thai baht has been very stable over the past few years. It has been traded within a narrow range (25 to 25.8 to the US dollar) since 1991 despite a sharp decline in interest rates during 1991 and 1992. ''In Indonesia, the rupiah, following its sharp devaluation in 1986, has managed to decline steadily by four to five per cent a year. ''Despite a sharp fall in interest rates since 1991, they are still relatively high and the rupiah manages to hold up pretty well. ''The [South] Korean won has stabilised against the US dollar since early February.'' ''The won will hold up well for the rest of the year.''