Markets back on a war footing (page 1 of 2)

Euro

The week began with market players looking ahead to a weighty batch of economic data and bracing themselves for crucial developments on geo-political front. The first in line of major data releases came about in the form of weaker-than-expected U.S. manufacturing figures from the Institute for Supply Management (ISM).

The data laid the foundation for a negative dollar bias as it showed the index slipped to 50.5 in February, from 53.9 a month earlier. Concerns about a possible war with Iraq being a "major deterrent" for many industries was cited as the main reason for the dip. In contrast, the Reuters Eurozone Purchasing Managers' index released earlier on the same day beat consensus forecasts and rose to 50.1 in February from 49.3 in January.

The dollar's sell-off was given an extra impetus following the Turkish parliament's decision last weekend to block U.S. forces from using its military bases. Additionally, Iraq willingness to begin destroying its missiles also inspired dollar selling, as together the two developments led to speculation that a war could at least be delayed if not avoided and raise the costs an already shaky U.S. economy is likely to bear. Euro/dollar rose to a high to 1.0899 on these concerns.

Midweek, the greenback extended its losses across the board, after being dealt a severe blow by comments from US Treasury Secretary John Snow who stated he was not concerned by the dollar's recent decline. The comments triggered a full cent rally in euro/dollar, propelling the pair to fresh four-year highs above $1.10. The 'Snowstorm on the dollar' allowed the single currency to break away from its all-too-familiar recent trading ranges as it briefly diverted market attention from all the war rhetoric.

Treasury spokesman Tony Fratto later put a temporary brake on the euro's climb by saying Snow still favoured a strong dollar and that "the secretary's position has not changed". German Economic Minister Wolfgang Clement also helped put a halt on dollar losses as he stated that a euro above $1.10 could hurt Germany's export industry.

However, the damage had already been done and market attention again moved to geo-political issues with the White House saying it would persist with a U.N. resolution paving the way for war on Iraq even as France, Germany and Russia teamed up to block the move.

On the following day, the European Central Bank (ECB) cut its key interest rate by a modest quarter percent to stand at 2.5. The euro initially edged lower, but soon bounced back as the market assessed that the 25-basis point cut could be positive for the eurozone economy and thus for the euro. Investors betting on a more aggressive half point reduction were forced to buy back euros.

Warning signals on the health of the European economies had mushroomed prior to the ECB announcement, with the Paris-based Organisation for Economic Co-operation and Development (OECD) saying its 2003 forecast for euro zone growth, currently at 1.8 percent, would likely be cut, while German data showed unemployment at five-year highs.

The dollar fell through a series of four-year lows against the euro on the last trading day as market conviction mounted that war in Iraq was imminent. The fears grew after U.S. President George Bush vowed to force a vote within days on a resolution authorising war, regardless of whether he could count on its passage.

Markets ignored a later report on Iraqi compliance with U.N. disarmament resolutions by chief U.N.