Dollar finds friends on all sides despite feeble growth in US: Wall Street shocked by flat GDP returns but consumer spending offers hope

THE DOLLAR climbed to a 22-month high against the mark yesterday, fuelled by a flight of capital from tension in the exchange rate mechanism and worries about an escalation in military action in Iraq and southern Lebanon. It closed 1.6 pfennigs higher in London at DM1.7345, but rose above DM1.74 in New York.

The dollar shook off figures showing that the US economy grew at a surprisingly feeble 1.6 per cent in the second quarter of this year - an improvement on the virtually flat January-March period but further evidence that the recovery that began in mid-1991 has yet to gain critical momentum.

Yesterday's news from the Commerce Department came as a shock to Wall Street, which had been confidently predicting expansion of around 2.5 per cent. Such indeed was the expectation of the normally cautious Alan Greenspan, chairman of the Federal Reserve Board, in public testimony last week.

Simultaneously came separate government data, showing that first-time claims for unemployment benefits jumped 43,000 last week to a 10-month high of 394,000. Although the havoc caused by the Midwestern flooding is a prime culprit, the figures bear out warnings from President Bill Clinton and others that the economy is not growing fast enough to create new jobs.

Despite the disappointing GDP returns, which follow revised growth of only 0.7 per cent in the first 1993 quarter, analysts expect an improvement. The main brake has been a cautious inventory policy by American companies. But consumer spending rose by a strong 3.8 per cent between April and June. If that keeps up, businesses will be forced to build up stocks, boosting gross domestic product prospects thereafter.

However, the short-term political consequences of the second-quarter figures could be damaging for the White House. So sluggish an economy is bound to increase doubts about the wisdom of the dollars 500bn deficit-cutting package.

The administration argues that passage of the Bill will remove business uncertainty, which has contributed to slow growth. Wall Street, however, warns that the dollars 250bn-plus of tax increases contained in the measure will weigh on growth. On one bright spot though, everyone agrees: that the risk of a spurt in inflation - currently running at around 2.6 per cent - has receded.