Share prices surged across the world yesterday and the dollar rose briefly while oil and gold prices tumbled after the capture of Saddam Hussein.
Traders rushed to buy stocks and the US currency on hopes that the news would restore flagging confidence among investors and consumers and cut the costs to the US of running Iraq.
But the reaction proved to be short lived as analysts said concerns about global security and the US economy had not been answered.
The pace was set by Japan, the first major market to open after news of Saddam's arrest, where the Nikkei surged 321 points, or 3.2 per cent.
Middle Eastern markets were early gainers on hopes of improved chances of peace in the region, with Israel and Egypt each gaining 3 per cent. Turkey enjoyed its best trading day in three years.
However, Europe struggled to hold on to early gains, with a 40-point rise on the FTSE 100 index in London slowly evaporating to leave a closing surplus of less than one point.
Justin Urquhart Stewart, a director of the stockbroker 7IM, said gains would be short lived. "I would expect the short-term positive move in the dollar and markets will be dissipated by the sound of echoing gunshots from Iraq," he said.
Wall Street also retreated in late trade, with the blue-chip Dow Jones index ending down 19 at 10,023 after earlier surging 97.4 points to 10,139.6. The wider S&P 500 ended down 6 at 1,068. Hugh Johnson, the chief investment officer at First Albany in the US, said: "Even though arresting Saddam is an uplifting event, it doesn't answer questions which are important to investors. It doesn't change the outlook for the economy and earnings for 2004. It doesn't signal the end of US involvement in Iraq. It doesn't signal the end of terrorism."
The dramatic news from Iraq initially appeared to stem the rout of the dollar, which had hit a record low against the euro for each of the previous eight days. It gained half a cent as dealers bought on optimism that the arrest of the Iraqi leader would ease pressure on US security expenditure.
However, the dollar later plunged to a fresh low of $1.2323 to the euro as news broke that nine people were killed and 29 injured in two car bombings in Baghdad.
Alan Ruskin, the research director at 4CAST in New York, said the dollar was also hit by figures yesterday showing the US attracted much less capital in October than it needs to fund its current account deficit, "more evidence, if evidence was needed, that the US has a serious current account financing problem on its hands".
Gold, a haven in times of conflict, initially fell more than $7 an ounce to $401.75 but recovered as the dollar fell back.
Oil prices dropped on expectations Saddam's capture would help the country, which has the world's second-biggest oil reserves, pump more crude. Brent crude oil ended at $30.05 after earlier falling as low as $29.60.
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