Currency markets shift focus away from war (page 1 of 3)

War will drop from the markets' agenda next week, leaving the traditional preoccupations of corporate results, manufacturing, inflation and economic sentiment data to take centre stage.

Next week financial markets will concentrate on U.S. Consumer Price Index, which tracks retail - level inflation, plus housing starts, business inventories, industrial production and weekly jobless claims.

Over the next two weeks investors would tune in to what companies say about the quarter that just ended as well as watch their forecast for the second quarter. In Europe, Germany's ZEW survey will catch most attention while French and euro zone industrial data will also be watched.

Euro

The European single unit commenced the week on a weak tone on news that U.S. forces had made advances in the difficult and complicated job of invading the city of five million people and that the regime of Iraqi President Saddam Hussein was nearing an end.

The market thought a quick end to the fighting would benefit the dollar, as apart from the cost of war to the U.S. economy, anxiety about it has been seen holding back spending by consumers and companies. The dollar rose as high as 1.0559 against the euro after further positive news that U.S. forces had captured two of Saddam Hussein's palace complexes in Baghdad and British forces were walking unopposed into the centre of Basra, Iraq's second largest city.

Later in the week euro managed to regain its losses climbing marginally above $1.0800 level as expectations of quick end to the war were undermined by worries that the American economic outlook may not be that promising even after the war is over. Rapid U.S. progress in the war, once seen as synonymous with a quick recovery in the U.S. economy appeared to be losing the leverage to lift the dollar and shares.

Market focus shifted towards the weak underlying fundamentals of the U.S. economy as investors looked past a war in Iraq and found little to cheer. Looking ahead to the potential problems down the road, such as how much it will cost to rebuild Iraq gave an underlying bearish tone to the dollar. In addition data released on Tuesday showed that U.S. consumer confidence in early April had recovered but retail spending remained depressed.

Political difficulties over reconstruction of post - war Iraq also made investors cautious. U.S. President George W. Bush and British Prime Minister Tony Blair continued talks on the post-conflict future of Iraq at their summit in Northern Ireland. Both leaders endorsed a "vital role" for the United Nations in Iraq, however President Bush mentioned only humanitarian work.

Midweek, the International Monetary Fund, warned that the global economy remained at risk. The IMF said that strong productivity, very low interest rates and the possibility of new U.S. tax cuts should enable U.S. gross domestic product to expand by 2.2 percent in 2003 and 3.6 percent in 2004. However, the institute noted that while the Fed's current policy was appropriate for now, further easing could be necessary.

The euro's rise was capped after U.S. television network Fox reported that marines might have found weapons-grade plutonium in an underground facility outside Baghdad. The news gave a lift to the dollar on views it could provide evidence for the U.S. contention that Iraq has weapons of mass destruction. Better than expected trade deficit figures provided additional support for the dollar.

The government reported that the U.S.