Dollar Heads to Biggest Weekly Drop in 8 Months on War Concern

March 28, 2003
By Vivianne C. Rodrigues

New York, March 28 (Bloomberg) -- The dollar headed toward its biggest weekly loss in eight months as more U.S. government and military officials predicted a protracted war in Iraq.

Demand for dollars fell as Lieutenant-General William S. Wallace, the U.S. Army's senior ground commander in Iraq, told the Washington Post that unconventional enemy tactics raised the likelihood of a longer war than some strategists had anticipated.

``This is not going to be an exact repeat of the Gulf War,'' said Rebecca Patterson, global foreign exchange strategist at J.P. Morgan Chase & Co., the fifth-largest trader in the $1.2 trillion- a-day currency market. The conflict may drag on a couple of months ``and the fear is U.S. consumers and businesses will hold off spending'' until the war ends, she said.

The dollar weakened to $1.0758 at 10:30 a.m. in New York from $1.0685 late yesterday. It has shed 2.2 percent against the 12- nation euro this week, the most since June 21. It may lose value to $1.12 in a few weeks, or sooner amid ``negative developments such as the use of chemical weapons,'' Patterson said.

The dollar had gained 4.3 percent the previous two weeks on optimism the war would end swiftly. The 1991 Gulf War lasted about six weeks.

The U.S. plans to bring in 90,000 more troops to support the 250,000 personnel in the Gulf region by next month, defense officials said this week. The coalition will fight for ``however long it takes to win,'' President George. W. Bush said yesterday. Iraq has moved chemical weapons to one of three Republican Guard divisions defending Baghdad, the New York Times reported, citing unidentified U.S. Army officials.

`Increasingly Expensive'

``A long, messy war will almost certainly be an unfavorable outcome for the dollar,'' said Michael Derks, a fixed-income strategist in London for Commonwealth Bank of Australia. ``A lengthy conflict will become increasingly expensive,'' hurting the U.S. economy. The bank forecasts the dollar losing value to $1.11 per euro in a month.

The dollar fell as crude oil headed for its biggest weekly gain in more than two years. Oil for May delivery fell 0.2 percent today to $30.30 a barrel on the New York Mercantile Exchange, while it's up 12.6 percent this week, the most since October 2000.

Declines in the currency accelerated as U.S. stocks dropped, driving the Standard & Poor's 500 Index down 0.4 percent today and 3.4 percent this week. Gold, a haven during international crises, climbed 1.6 percent this week to $332 an ounce.

``You keep one eye on the equity market, one on gold and if you have a third you keep that on the currency market,'' said Shaun Osborne, chief currency strategist at Scotia Capital Inc.

U.S. Economy

Adding to evidence the U.S. economy is stalling, the University of Michigan's consumer sentiment index fell to 77.6, the lowest in more than nine years, from 79.9 in February. U.S. personal spending remained unchanged in February for a second month, the Commerce Department reported.

The economy expanded between October and December at about a third of the previous quarter's pace, hobbled by slower consumer spending that shows few signs of rebounding because of the war.

The yen fell against the dollar after Finance Minister Masajuro Shiokawa signaled Japan may sell its currency, boosting earnings for exporters, who close their books for the financial year on Monday.

The dollar rose to 120.10 yen from 119.97 yesterday. Japan's currency has strengthened more than 10 percent against the dollar in the past year and fallen more than 10 percent against the euro. The euro rose to 129.23 yen from 128.19, the most in a month.

Yen Sales?

A stronger yen erodes profits from exports, which account for about 11 percent of the country's economy. The Bank of Japan sold a total of 1.2 trillion yen ($10 billion) in January and February at the finance ministry's request.

``There still is speculation Japan will sell, which is supporting the dollar,'' said Minoru Shioiri, senior manager of the treasury and foreign exchange division at Mitsubishi Securities Co. The dollar may rise to 120.70 yen today, he said.

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