''Although Hong Kong investors are heavily involved in foreign exchange speculation, they have preferred dollar-based currencies,'' the analyst said.

According to Benjamin Chan, chief economist with the Bank of East Asia, customer deposit distribution in Hong Kong at the end of May stood at $747 billion in Hong Kong dollars, $415 billion in US dollars and $452 billion in other currencies.

''Hong Kong investors became particularly active in the forex market three years ago, when interest rates in the territory and the US were falling in relation to interest rates in Europe, which were quite high,'' said Mrs Gately.

''For the serious forex players, the Hong Kong and US dollars lost their attractiveness so investors went straight for the high-yielding foreign currencies, particularly those in Europe, to maintain the value of their savings.'' As another analyst explained: ''Many investors got burnt last year during the European monetary crisis, while others made a killing. It is all a matter of timing.

''Many of our clients holding French francs were hedging months ago. You didn't have to be an Einstein to see that the franc was heading for a fall. The only question now is: Where will the Deutschemark go?'' The best advice analysts can give for the faint hearted is to seriously under weight their European currency portfolios in favour of safe-haven currencies, such as the Swiss franc, dollar-denominated currencies, such as the US, Hong Kong or Australian dollars, or Japanese yen.

Some investment analysts are even suggesting gold, which soared through the US$400 barrier in the wake of Europe's monetary crisis, as a possible investment alternative. Others, however, question whether or not gold's new-found buoyancy will last.

As one analyst said: ''With Europe's exchange rate mechanism (ERM) in tatters, there is a real possibility of gold becoming a safe-haven investment.

''Last Friday alone, gold gained US$13 an ounce in one day. In London, it and New York gold closed at around US$407.25 an ounce.'' One bullion analyst said: ''Gold has been steadily gaining in value since March, when it bottomed out at US$326.25 an ounce, due to such factors as violence in South Africa, the world's leading producer, tension in the Middle East, and speculation by dealers.'' However, even with the EMS close to collapse, the long-term prospects for gold are still unclear and there is little unanimity on how the situation will develop.

Andy Smith, an analyst with the brokers UBS Phillips and Drew, warned that a sudden reversal was always possible. If the bulk purchasers, whose decisions govern the market, decided to realise their gains, it would cause a collapse as brusque as the latest surge.

''Euphoria makes dealers blind to anything but good news, providing still more pretexts for buying gold,'' he said.

For Lindsay Falconer, on the other hand, Friday's decisive breakthrough above the US$400 threshold could prepare the way for further advances.

George Pillai, director and managing economist for the Institute for the Development of Economic Analysis, said: ''Over the past week, we've seen a huge influx of dollars going into Europe in anticipation of the devaluation of the ERM.

''We are very likely to see some profit-taking next week by Hong Kong and international investors. A lot of the good news is already priced in and we may see the old 'buy the rumour and sell the fact' trading develop on Monday if, as we expect, we get a devaluation/floatation this weekend. So investors buy the DIPS!'' He suggested Hong Kong investors should look at the European bond market.

''In order of preference, look at Spanish bonds, French, Portuguese, Danish, and Belgium,'' he said.

''Investors going for bonds should look at the short-to long-term curve. Although they're both attractive, there should be very high returns for short-term bonds.'' Mr Pillai suggested investors' preference should be for two-to five-year government bond curves, compared with 10-year ones, as these bonds should see outperformance - given the high interest rates.

''But if investors needed to hedge their currency exposure, especially under a floatation system, the exception would be the franc. There was really no need to hedge against the franc,'' he said.

''Now is also the time to buy dollars, swap back into dollars. But, besides dollars, investors can go for yen or Swiss francs, since they are far enough removed from the turmoil of the ERM.

''Take advantage of UK Gilts. You have a safe haven because they're removed from the ERM turmoil. Also the currency is looking stable. Amid the mess, investors can really pick up on some high yields for long-term UK gilts.

Mr Pillai also pointed out that investors had two scenarios: there would either be an announcement this weekend about the official devaluation of the ERM, or it would come about some time next week. If it happened during the weekend, investors should hold out, wait a little bit before diving in, he said.

''If it hasn't been announced, jump into the market because European interest rates will fall by two to three per cent. Possibly three to four per cent in France, making European bonds and equities very attractive.

''Right now, we've got a gap between US and European interest rates. If European interest rates fall, this gap will narrow and investors should take advantage of buying the dollar, which will be far less expensive. The dollar is very attractive.'' Mr Pillai said Hong Kong investors had missed the large part of the profit-taking, but even going after the opportunities now would promise them some attractive returns.

There are two other possible two scenarios: There will either be a float or a devaluation of the ERM. In the case of a float, investors should be very bullish regarding the rate outlook.

''We will very likely see a cut in rates in France, Spain, Portugal, Belgium, and Denmark of three to four per cent in the next three months, similar to the scenario after sterling was floated.

''The other scenario is an official devaluation, meaning the outlook remains the same but the timing is pushed out considerably.'' Renu Bhatia, senior investment manager for Wardley, said:''For Hong Kong retail investors we would stress that the European market doesn't have much further to go. Even though there are some ways to benefit from the turmoil, the Hong Kong investor might be safer to look at the Asian markets.''