Iraq war fears haunt Wall Street and the dollar

American consumers' confidence fell, industrial output dipped, the trade deficit hit an all-time record and the dollar hit a new low yesterday, as the impact of war speculation continued to harm the economy.

A batch of gloomy figures from the US put the skids under Wall Street and the dollar as the latest twists and turns in the Iraqi weapons inspection process frightened the markets.

Speculation rose that yesterday's figures, which are the latest in a run of negative figures, will prompt the Federal Reserve to cut interest rates later this month.

There was an unexpected fall in optimism among households – the first dip in three months – according to the closely watched University of Michigan survey.

The fall in industrial production in December, when it dropped by 0.2 per cent, was also a surprise and was driven by a fall of almost 5 per cent in car production. Analysts had expected a 0.3 per cent rise.

The US's trade deficit surged 13.9 per cent in November to a record $40.1bn (£24.9bn), as imports increased sharply and exports showed only slight gains.

Although the rise in imports pointed to continued consumer demand, analysts said that with the dollar already falling, the scale of the deficit had further undermined confidence in the currency.

The dollar fell to a fresh three-year low against the euro of $1.0668, its highest since October 1999, and now looks on track to break through $1.07.

The dollar was further undermined by reports that central banks in a number of emerging economies were shifting their reserves from dollars into euros.

Economists added that the trade deficit would cut estimates of GDP growth, which could now come in at zero for the fourth quarter, that would open the door to a rate cut when the Fed meets on 28 and 29 January.