Currencies track the war news

Euro

The dollar commenced the week on a soft note against the euro on growing concerns that the U.S.- led war in Iraq could take longer than some had expected. The longer the conflict goes on, the more money the United States has to spend, pressuring an already expanding fiscal deficit and undermining the greenback.

U.S. President Bush is expected to seek nearly $75 billion for the war against Iraq. The dollar tumbled against the euro and Swiss franc, more than erasing gains notched up when news reports of massive aerial bombardments of Baghdad and of U.S. led forces advancing virtually unopposed through the Iraqi desert, heartened investors looking for a quick end to the war. In addition, drop of more than 3 percent for major U.S. stock indexes was also hurting the greenback.

Midweek, the dollar pared most of its losses amid reports of a popular uprising in the Iraqi city of Basra. News of an apparent uprising made markets believe that the United States was gaining support from Iraqi people, which could make it easier for the U.S. led forces to occupy the capital, Baghdad.

U.S. stocks meanwhile rallied, sending the blue chip Dow Jones Industrial Average up 1.4 percent, while the tech-laden Nasdaq gained more than 2 percent. On the economic front, the release of the U.S. Consumer Confidence data, which fell to 62.5 in March from a revised 65.8 in February, in line with expectations, played second fiddle to the developments in Iraq. The Conference Board's survey was taken in the days before the United States began its attack on Iraq.

Towards the last trading days of the week, the dollar weakened again paying scant attention to the flurry of gloomy U.S. economic news and focusing instead on the headlines about the war. As the war moved into its second week, Bush said the conflict was 'far from over' and that the path ahead for the U.S.-led forces would not be easy and may be long.

In a joint news briefing with British Prime Minister Tony Blair, Bush also said that the Iraq war would last 'however long it takes to win'. The euro hit a high of $1.0801 before closing the week at $1.0770 levels. The euro showed little reaction to news western Germany's Ifo business climate index unexpectedly fell in March, to 88.1 from 88.9 in February.

Negative news for the euro also came from Germany's warnings that its budget deficit in 2003 would likely be above the 3 percent of gross domestic product limit set by the European Union's Stability and Growth pact. Traders also took notice of comments by ECB member Ernst Welteke who said bluntly that a rate move from the ECB next week was unlikely if the global situation remained unclear.

The markets also paid no attention to a mixed batch of U.S. economic data. Consumer spending was unchanged in a storm-battered February, but incomes posted a 0.3 percent advance. The University of Michigan's final March consumer sentiment index came in better than expected at 77.6, though it fell from February's reading of 79.9.

With both the United States and its main ally Britain warning that the war could drag on, traders are starting to look beyond the war trade and to market fundamentals.

Business surveys out of United States and Europe next week will be scrutinised to assess how much damage a prolonged war could have on the real economy. The ECB meeting on Thursday and US jobs report due on Friday will also be watched closely. Analysts expect the ECB to leave interest rates unchanged at 2.5 percent.

Range for the week: $ 1.0600 - $1.1100

Japanese Yen

The dollar's losses against the yen at the start of the week were moderated by speculation Japanese authorities may take further steps to boost liquidity.

However, the greenback lost most of its gains after an emergency meeting between Finance Minister Masajuro Shiokawa and Bank of Japan Governor Toshihiko Fukui ended without any major changes in policy that could have weakened the yen.

The BOJ, holding its first policy setting gathering under its new Governor, decided to leave monetary policy unchanged but to provide as much liquidity to the market as needed for the time being. The dollar's downside was also indirectly supported by investors building long positions in cross yen trade, including the Australian and Canadian dollars.

Meanwhile, Japan's top financial diplomat Zembei Mizoguchi, repeated his warning that the Finance Ministry was ready to act to prevent large swings in foreign exchange rates.

The dollar was trading 120.00 against the yen on the last trading day, after sources said Japanese monetary authorities had conducted dollar-buying intervention during London and New York trading hours in the past few days, continuing this year's pattern of covert intervention.

In the coming week, the quarterly survey of business sentiment by the BOJ will be closely watched for any impact of the recent stock market rout and uncertainty stemming from war in Iraq.

Range for the week: 118.00 -123.00.

Sterling

Sterling advanced against the limp dollar and eased versus the euro as markets took heart from rising public support for the British Prime Minister Tony Blair while fretting over war.

The public outcry seemed to dwindle after the war began, decreasing pressure on Tony Blair and fanning markets' hopes for lessened political uncertainty with Blair facing a smaller chance of being ousted. Sterling pushed to a one week high of $1.5795 after reports of fierce resistance from Iraqi troops weighed heavily on the dollar.

However, the pound soon slipped against the euro and dollar on the last trading day as concerns grew over the length and cost of war. UK Chancellor of Exchequer Gordon Brown raised the war budget to 3 billion pounds from 1.75 billion.

Meanwhile, comments from BOE Monetary Policy Committee member Marian Bell who told Reuters in an interview the bank could still cut interest rates again, temporarily shifted focus away from the U.S. and British led war and pressured the pound.

Range for the week: $ 1.5600 - $ 1.6100.