Geopolitical fears continue to dominate (page 1 of 3)

Euro

The U.S. dollar carried over some of its momentum from a week earlier, when it rose on news that non-farm payroll surged in January at the fastest pace in two years. But jitters over possible war in Iraq gnawed its gains.

German Chancellor Gerhard Schroeder and Russian President Vladimir Putin said they hoped Iraq could be disarmed peacefully. Putin said this was also broadly the attitude of France and China, fellow veto wielding members of the UN Security Council.

US President G W Bush, on the other hand, kept up pressure on Iraq and the United Nations, saying that Baghdad must disarm and that the UN Security Council must move quickly or is deemed irrelevant.

The greenback also moved higher after Iraq agreed to unconditional reconnaissance flight over its territory to seek out banned weapons. The dollar remained firm even after White house dismissed the offer, saying "the bottom line" was for Baghdad to disarm.

In Europe, also adding weight to the euro was another set of gloomy German data where industrial productions for December registered its worst fall in four-years. Reports that Germany was preparing the ground at European level to loosen budgetary policies, a move seen by the market as reducing fiscal responsibility also pressured the euro lower.

The European Central Bank said in its monthly bulletin that growth risk in the euro zone remained tilted towards a slowdown, but said that judging economic and monetary policy implication of a war in Iraq is almost impossible. The head of Germany's engineering employer association said there is signs the euro's gains are starting to impact exports because prices become less competitive.

Later in the week, the greenback yielded to downward pressure after Federal Reserve Chairman Alan Greenspan said at the start of his twice-yearly testimony to congress that geopolitical fears were creating "formidable barriers" to US business spending.

Greenspan's testimony was split into two: (1) the economy and (2) fiscal discipline. The fiscal section covered a lot of ground that Greenspan has already covered before, but the new bit was that a stronger economy would not automatically fix the medium term deficit problem.

On the economy, the text spent plenty of time suggesting that growth has been and is continuing to be constrained by the Iraq factor. It is this geo-political risk that has contributed significantly to lower equity values, wider corporate spreads, tightening bank lending standards, and general risk aversion that has dampened business outlays and hiring.

In a sense, it's Saddam's fault that the economy is not growing quicker. The Fed has placed its bets then: the economy will strengthen nicely once Iraq is out of the way. This is Greenspan's "more probable expectation". If this view is right, one could imagine that Fed rate hikes would be back on the agenda towards year-end.

However, the Fed admits it could be wrong. Although unlikely, Greenspan says there is a chance the economy could instead be "laboring under persisting strains and imbalances that have been misidentified as transitory". So once Iraq is out of the way, and if the economy stays weak, Greenspan says, "various initiatives for conventional monetary and fiscal stimulus will move higher on the policy agenda".

Greenspan's comments weighed on US stocks, as did an audio tape broadcast said to be from Osama Bin Laden saying suicide attacks were important in fighting America.