Dollar slides to brink of free fall

Worldcom scandal: Currencies: Latest Wall Street disaster sends investors all over the world running for cover

The US dollar yesterday moved to the brink of free fall ­ a nightmare scenario for the world economy ­ after reverberations from the WorldCom scandal triggered panic among investors.

The currency came within a whisker of parity with the euro and crashed through key psychological barriers against the yen and the pound as investors rushed to dump dollar assets.

"This is threatening to become a disorderly market," David Bloom, global economist at HSBC, said. "There's no better way to show a loss of confidence in a country than through its currency."

Speculation mounted that the Federal Reserve would lead the world in a fresh round of interest rates cuts amid fears of a deflationary slump, although it kept rates on hold last night.

The dollar tumbled as much as 1.5 per cent to 99.42 cents to the euro, its weakest level since February 2000, from 97.22 late Tuesday. It fell below 120 yen for the first time despite three interventions by the Bank of Japan overnight to support the US currency. The misery was compounded by confusion over the US's dollar policy and a roller-coaster day on Wall Street.

The Dow gyrated between a 200 point fall and 34 point gain before ending down 6.7 at 9,120.1, while the Nasdaq recovered from 2 per cent fall to end up 5.3 points at 1429.3, still within a whisker of a five-year closing low. In Europe the FTSE 100 fell 100 points to 4,531, above an earlier nine-month low of 4,442.

The US President, George Bush, appeared to imply the administration had abandoned its strong dollar policy. The White House later was forced to insist there had been no policy change after Mr Bush said the currency would "seek its own level based on market forces".

The WorldCom scandal, coming hard on the heels of the Enron collapse and crises at Tyco and Adelphia, is the latest piece of news to undermine the dollar.

Sharp falls on Wall Street and fears about the solidity of the US economy have slowly undermined the dollar over the past few weeks. A dollar collapse is seen as one of the greatest threats to the nascent global economic recovery.

Mark Cliffe, a global economist at ING Financial Markets, said: "If the dollar's decline turns explosive, this could compound the problems of the US asset markets as currency losses raise fears of a massive capital flight out of the US."

Americans have collectively acted as the consumer of last resort through the financial crises of 1997, 1998, 1999 and even during the latest slump, sucking in imports from the rest of the world. More importantly, investors were happy to pour money into US markets to cash in on booming hi-tech industries.

Now, however, outsiders may be deterred from pumping any more money into the US, for fear the cash will simply be squandered. "We thought it was a bubble, but perhaps the whole thing was overstated," Mr Bloom said. "The dollar bull market was just plain wrong."

A dollar crisis would be a major headache for the Fed in its struggle to juggle tumbling markets with signs of a strong economic rebound. There was serious speculation ahead of last night's monetary policy decision that the Fed would cut rates despite figures showing new home sales soared to a record and factory orders increased in May.

Gold rose as much as $6.33, or 2 per cent, to $325.75 an ounce in London. The metal has risen 16 per cent so far this year, its best first-half performance since 1980.