War Jitters Bother Dollar

The heightened risk of a war in the Middle East that could draw the United States into the conflict has driven down the dollar, with this week’s full-scale Israeli military occupation of additional Palestinian territories.

The dollar lost about one percent against the euro (€), over the course of a week, until Tuesday it appeared poised to steady.

The euro had been protected by the four-day Easter break and by the continent’s comparatively removed diplomatic involvement in the Middle East.

But there was no guarantee that this balance would hold in Europe’s favour, as the euro-zone economies are growing more slowly than the United States, and they remain especially vulnerable to economic shocks related to oil prices.

Involvement and oil

"You could argue that US involvement is negative for the dollar, but at the end of the day, the economy there is stronger and inflation is not a concern. I don’t see why it should hurt the dollar," said Lee Ferridgge, head of global currency strategy at Rabobank in London, Reuters reported.

"The euro has no domestic oil, inflation is more of an issue, and the economy is fragile."

Meanwhile, the risk of rising oil prices – now moving above $27 a barrel after an Iraqi call to use oil to put pressure on the US and Israel – may do less harm to the American economy than Saddam Hussein would like, some analysts said.

"It’s not clearly negative to the dollar. The increase in oil prices could be seen as something which will dampen down the economic recovery, but the US economy is maybe more able to weather than European ones," Rob Hayward, senior foreign strategist at ABN Amro, told Reuters.

Overall competition

The dollar’s Easter-season slump against the euro did not reflect the overall state of the US and European economies.

Monthly indices of "purchasing managers" (PMIs) read by economists as a measure of manufacturing and consumer volume showed the US outpacing Europe in early 2002.

The euro-zone posted a PMI of 50.0 as markets opened April 2, suggesting that the economic slowdown has ended in the region, but PMI in the United States was already some five points higher, suggestive of not just steadiness but growth.

Traders watching to Europe’s new currency to see how it will measure up against the dollar over the long haul have seen it take a wild ride, ranging from near €1.20 to a dollar in July 2001 to €1.08 in September 2001, but it has held rather steadily between €1.13 and €1.16 since late January this year.

The current rate of exchange Tuesday afternoon was €1.14 to a dollar.