Dollar and oil rise sharply on Iraq worries

THE ESCALATING crisis in Iraq prompted sharp rises in oil prices, the dollar and US government bonds yesterday.

The dollar hit a one-month high against the yen, with the disappointing economic package unveiled in Tokyo also helping to undermine the Japanese currency.

The US currency climbed more than 1.5 per cent to 123.98 yen, before later paring some of its gains in New York trade.

Dealers speculated that military intervention in the Gulf would disrupt oil deliveries from the region.

Early yesterday evening, December Brent crude oil futures were trading 18 cents higher at $12.29 a barrel, having been up as much as 40 cents earlier in the day. However, dealers noted that Brent crude was still more than $4 a barrel down on the year.

Investors began to move their money to the "safe haven" of US government bonds, which opened strongly higher in New York. Other bond markets also fared well, a reflection both of the tensions in the Gulf and the disappointing performance by Asian and European stock markets.

Nick Stamenkovic, chief economist at Bank Austria Creditanstalt Futures said: "Bond markets have benefited from a weakness in equities which was triggered by a disappointed reaction by the Japanese equities market to the latest Japanese fiscal package."

The Japanese Nikkei stock index tumbled by almost 2.5 per cent after the ruling Liberal Democratic Party (LDP) outlined an unimaginative 18 trillion yen (pounds 90bn) fiscal package.

The LDP wants to cut the top rate of income tax as well as the rate of corporation tax, but analysts had been hoping for cuts in the rate of sales tax - an indirect tax like VAT.

Economists are sceptical about the benefits of cutting Japanese income tax, as the additional money tends to be saved by consumers rather than spent.

Mr Stamenkovic said: "This package is unlikely to trigger a substantial pick-up in domestic demand, crucial for recovery."

The negative sentiment in Asia spilled over into the London stock market, where the FTSE 100 closed down 27.8 points at 5449.