Iraq war progress boosts US dollar (page 1 of 3)

News of advancement from coalition forces cheered the dollar and Wall Street while any setback and increased concerns of a prolonged war dampened the greenback's image.

Like this week, next week will also see markets focusing heavily on headlines coming out of Iraq. They will also be eyeing U.S. consumer sentiment and retail sales data to check for any clues on the war's early impact on the U.S. economy. Britain will also be high on the agenda with the Bank of England's decision on interest rates.

Euro

The week started with US dollar slipping to two week lows against the euro as a quick end to the war in Iraq seemed receding and worries mounted about the economic outlook in the United States.

Many investors are worried that the cost of a longer war will exacerbate the United States' precarious finances, making them wary of investing in the world's biggest economy. The currency markets were focusing their attention on developments in Iraq as well as the twin deficits in the U.S. and its economy. The twin deficits are in the budget and current account.

The United States needs to attract some $2 billion of foreign capital every working day to offset its current account deficit. The view of some U.S. leaders prior to the start of the war that many Iraqi units would not fight and that U.S. troops would be welcomed as liberators was not being seen.

U.S. Vice President Dick Cheney had suggested three days before the outbreak of fighting that it would "go relatively quickly" and wrap up in "weeks rather than months", leading investors to bid the dollar higher on hopes Iraq would fall quickly, reducing the number of lives lost and the cost to the U.S. economy. The European single currency continued its march upwards, seen easily crossing the $1.0900 levels, due to weak economic data.

In fresh evidence that the U.S. economy was suffering, a major U.S. regional manufacturing index showed activity shrunk dramatically in March. The National Association of Purchasing Management-Chicago said its index of manufacturing activity in the U.S. Midwest fell to 48.4 in March, falling below the 50 level separating expansion from contraction for the first time in five months.

The index was sharply off from 54.9 in February and well below economists' expectations for a reading 50.7. Furthermore, thoughts of a prolonged war were also seen on the stock market with Blue chip and technology issues falling sharply.

Midway through the week the dollar was seen supported as traders got used to the idea that the war in Iraq may drag on for some time. However, the euro did briefly rise to a high of $1.0959 as investors speculated what would come out of an emergency news conference called by the U.S. military. That rise was short-lived after a U.S. official at the conference said an American prisoner of war had been rescued in Iraq.

Furthermore, the greenback also staged a rally after Iraqi leader Saddam Hussein failed to show up for a television address to his nation. Although a government spokesman did read out a message to be from Saddam, in which he called on Iraqis to fight invaders "everywhere," Saddam's no show raised speculation that he was either dead or incapitated and that the White House was a step closer to its goal of "regime change" in Iraq.

News from the economic front did little to falter the dollar's advance. The Institute for Supply Management's index of the U.S. manufacturing activity showed the sector contracted sharply in March, falling to 46.2 from 50.5 in the prior month.

The dollar kept consolidating its gains and rose higher coupled by news of coalition troops advancing closely towards Baghdad and capturing the city's airport and a positive rally on Wall Street.