War in Iraq strengthens US dollar (page 1 of 2)

Euro

The week started with US dollar softening across the board after the US President George W Bush gave the United Nation one more day to find a diplomatic solution to the Iraqi crisis before resorting to military action.

Financial markets sold the greenback in search of safe haven currencies pushing the euro and other major currencies higher. Traders sold dollars on views that a US led war without much international support would leave the US footing most of the bill for the conflict and would discourage US investment flows, both of which would hurt the US economy.

The dollar gyrated wildly after US President GW Bush warned Iraqi President Saddam Hussein and his sons to leave Iraq within 48 hours deadline to avoid war, fuelling expectations that the conflict was imminent. As the clock started ticking, the US dollar rallied higher on expectations that a US led war in Iraq would begin soon, and on speculation that it would end quickly. As the deadline came closer the greenback steadied and traded in razor thin range as the market held its breath for the launch of an attack.

While the market was focussed on Iraq, the US Commerce department reported that groundbreaking on new U.S. homes slowed in February to the lowest level since last April, with demand curtailed by harsh winter weather. The market shrugged off the US Federal Reserve's decision to keep the Fed fund rate steady at 1.25 percent.

The Fed.'s unexpected decision to not give an assessment of economic risk, on the grounds that it is too difficult to characterise, raised some eyebrows in the market. The Fed said it would practice "heightened surveillance" until uncertainties in the economy abated, language that economists said did not preclude an intermeeting rate cut but did not necessarily signal one either. In the euro zone, data showed the region's consumer prices rose faster than expected in February, taking the annual inflation rate to a 11-month high of 2.4 percent.

The opening salvo of war against Iraq dented the dollar's momentum on Thursday, with dealers selling the dollar against major currencies as they mulled the potential for a long drawn-out conflict.

Early Thursday morning, U.S. President George W. Bush ordered American and British forces to begin bombing select targets in Baghdad, the first stages of what he termed "a broad and concerted campaign" to topple Iraqi President Saddam Hussein.

Although the U.S. currency immediately set new two-month highs against the euro and Swiss franc, it pared those gains as concerns grew among dealers that the war could be protracted and may involve heavy casualties. In his speech from the Oval office, Bush cautioned that the looming battles "could be longer and more difficult than some predicted."

Currency markets turned extremely choppy after the assault started, with the value of the dollar rising or falling depending on perceptions of how well the war was going for the United States and its allies.

The start of a massive aerial bombardment of Iraq called the "shock and awe" campaign by the Pentagon, and reports that US and British forces had taken the key port of Umm Qasr strengthened the belief among traders that the conflict would be short-lived. The dollar soared to the day's highs on reports Saddam Hussein may have been killed in the initial salvo against Baghdad in the wee hours of Iraq's morning on Thursday. Officials later cast doubt on the reports.

In Europe, Germany, France and Italy, already on course to breach the European Union's budget rules as their economies stagnate, now have justification for letting their deficits widen: the war in Iraq.