Iraq war progress boosts US dollar

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. Demand for the greenback rose following a healthy start to proceedings on Wall Street.

All major indices were seen floating in positive territory. News that U.S. troops came close towards Baghdad and were situated just 20- miles shy of the Iraqi capital and an announcement by the Pentagon that two divisions of Iraq's Republican guard- the Baghdad division in Kut and the Medina division- had been destroyed also fuelled the dollar's aggressive gains.

However, the advancement also raised concerns, and limited dollars strength, that Iraq may use chemical weapons now that the U.S. troops are inside the so called 'red line,' the area where the U.S. military says Iraqi forces might be most likely to launch a poison-gas attack.

Nevertheless, even weak data from the U.S. did little to fade the dollar. Data showed factory orders tumbled 1.5 percent in February, more than the 0.6 percent fall expected by economists. January's rise in orders was revised down to 1.7 percent from 2.1 percent.

Further data at the end of the week showed Americans filing for unemployment benefits for the first time jumped to 445,000 last week, up 38,000 from a week earlier and the highest level in nearly a year. Furthermore, the Institute for Supply Management said its index of non-manufacturing activity fell to 47.9 from 53.9 in February, moving below the 50 line.

This was the lowest reading since October 2001.The dollar was partly supported due to weakness in economic data everywhere. The Reuters Eurozone March services business activity index fell to 47.7 from 48.9 in February. Despite Europe's weakness, the European Central Bank decided at its Thursday's meeting to keep interest rates unchanged.

Even weak U.S. jobs report did little to hinder dollar's strength. The U.S. Department of Labour reported that the number of Americans with jobs fell by 108,000 in March, more than three times the consensus forecasts of a 29,000-drop. It also revised the number of Jobs lost in February to 357,000 from the 308,000 initially reported.

Range for the week: $1.0500 - $1.1100

Yen

Japanese yen started the first day of the week on the back foot partly due to commercial buying by Japanese operators on the last day of the Japanese financial year. Dollar's downside against the yen was limited due to intervention fears by Japanese monetary authorities.

Japan's finance Ministry said at the start of the week that its cumulative yen-selling amounted to 2.4 trillion yen in January-March period, much smaller than the record intervention of 4.0162 trillion yen in the April-June quarter last year.

However, the Japanese currency strengthened to two-week highs against the greenback on fears of a long war in Iraq and a mixed Bank of Japan's 'tankan' sentiment survey. The main diffusion index for large manufacturers in the quarterly survey was minus 10, compared to a median forecast of minus 8 by 25 economists polled by Reuters.

It was down from minus 9 in December's survey and the first worsening in five quarters, though it was in line with the forecast given in the December survey. The big manufacturers were slightly worse than the market forecast, while the non-manufacturers were slightly better.

Furthermore, the tankan survey also showed that big Japanese companies expect an average dollar/yen rate of 118.03 yen for the new business year, compared with expectations for 122 yen in the last financial year.

The Japanese yen's rise was, however, capped by fear on intervention by Japanese authorities and advancement by U.S. troops on the war front. Midway through the week Japanese Finance Minister Masajuro Shiokawa said that the Japanese authorities were ready to back up verbal warnings against currency fluctuations with action and stated the MoF was closely monitoring the forex markets.

Furthermore, Japan's top financial diplomat, Zembei Mizoguchi, told reporters that volatility in the foreign exchange market was undesirable and Japan would take appropriate measures to prevent it. The end of the week saw the dollar gaining strength against the yen on news of U.S. troops' advance in Baghdad, encouraging Japanese investors to buy dollar.

Range for the week: 117.00 - 123.00

Sterling

Sterling started the week on a weak note as prospects of a prolonged war increased in Iraq.

Furthermore, data showed growth in mortgage lending, while remaining strong, slowed in February, raising questions as to whether the housing market, a key determinant of the consumer spending, has peaked.

Sterling slid further as signs British economy was weak, increased concerns over UK participation in a long and costly war. A survey from the Chartered Institute of Purchasing and Supply showed Britain's manufacturing sector contracted for a fourth straight month in March, while an industry report showed retail sales volumes suffered their biggest year-on-year fall in over a decade, diving down to -13 in March from +2. Moreover, the expectations balance skidded to 0 from +14, an eight-year low

However, sterling bounced back midway through the week amid reports of U.S. forces advancement. Furthermore, a survey showing house prices in Britain continued to rise at a healthy pace last month also gave sterling support after earlier dismal news on Britain's manufacturing and retail sector.

Halifax, Britain's largest mortgage lender, said house prices rose 1.1 percent in March from February to give an annual rate of growth rate in the three months to March of 23.4 percent. However, speculation rose for an interest rate cut by the Bank of England due to earlier poor data.

The Bank's Monetary Policy Committee meets next week and a Reuters survey showed most of the 30 economists polled expected no cut, partly to avoid being taken as passing judgement on the budget. Also, Chancellor of the Exchequer Gordon Brown is due to unveil the 2003/04-government budget on Wednesday.

Range for the week: $1.5400 - 1.6100