Iraq war fears send dollar tumbling to new low

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The dollar yesterday fell to its lowest against the euro in almost three years, reflecting concern among investors that the US is moving closer to unleashing a war against Iraq.

The dollar yesterday fell to its lowest level against the euro in almost three years, reflecting concern among investors that the United States is moving closer to unleashing a war against Iraq.

The US currency has in the past few days slumped to a point which is 14 per cent lower than the euro and almost 9 per cent down on the yen compared with earlier this year.

The fall comes after American political leaders have adopted a more aggressive stance towards hunting for banned weapons in Iraq and signalled their displeasure with North Korea's apparent desire to resume nuclear bomb programmes. The dollar fell to $1.0356 against the euro in Tokyo yesterday, from $1.0323 on Wednesday. Earlier it was at $1.0358, the dollar's weakest level against its 12-nation European counterpart since trading at $1.0369 on 12 January 2000. The euro closed in New York at $1.0376, up half a per cent on the day.

Foreign exchange dealers said quiet trading over the Christmas holidays had been compounded by a lack of appetite among investors for the dollar.

Bearish traders believe a war would make it harder for the US to attract enough foreign investment to offset its current account deficit. The country must pull in almost $1.4bn (£875m) a day to sustain the dollar's value.

Some analysts also fear that a sustained attack on Iraq would destabilise the strategically crucial oil producing nations in the region, possibly sending the cost of the fuel so high that it triggers another recession in the US.

Minoru Shioiri, foreign exchange manager at Mitsubishi Securities in Tokyo, told Bloomberg news wire: "Nobody wants to buy the dollar. All anyone is talking about is what the US is going to do about Iraq and North Korea."

Gold benefited from the uncertainty of the global economic outlook, heading for its biggest annual gain in 23 years. Gold futures have soared about 23 per cent in 2002 to a five and a half year high, with the February contract closing yesterday at $349.40 an ounce, up $2.10.

Alarming reports about events inside Iraq have sent fresh jitters through world stock markets. Israel's Ha'aretz newspaper reported that Saddam Hussein had ordered some of Iraq's weapons to be hidden in Syria, citing the Israeli Prime Minister, Ariel Sharon, as its source. Syria strongly denied the allegation.

South Korea's President Kim Dae Jung expressed "deep concern" about North Korea's nuclear programme. The conflicts may prompt international investors to keep their money at home, traders said.

Mr Kim said in a statement after holding a security meeting with senior government officials: "To prevent the current situation from getting worse and becoming a crisis, close agreement among the US, Japan and other allies is needed to achieve a peaceful solution."

Earlier in the week Donald Rumsfeld, the US Defence Secretary, warned North Korea that America was capable of fighting two wars at a time, after North Korea admitted it had removed United Nations monitoring cameras at its mothballed nuclear reactor.

The dollar shed about 5 per cent this month against the Swiss franc, falling to its lowest level since January 1999. The franc has traditionally been a refuge during global crises because of the perceived neutrality of Switzerland and the stability of its economy. The dollar fell to 1.4024 against the franc from 1.4086.

Meanwhile, Vitor Constancio, governor of the Bank of Portugal, said the euro's rally against the dollar was helping contain inflation in the 12-nation eurozone. The central bank chief said he expected Portuguese inflation to decline in 2003 in part because of a slowing economy and as the effects of a rise in value-added tax lessened.