December 15, 2002	Sunday	Shawwal 10, 1423

NEW YORK, Dec 14: The dollar took a beating on Friday, falling to a near three-year low versus the euro and four-week low against the Japanese yen on heightened investor concerns over the US economy and security.

Upbeat December US consumer sentiment was not enough to offset concerns over conflict with Iraq. Those worries were fueled by an initiative to vaccinate US citizens against smallpox and a preliminary US and United Nations conclusion that Iraq did not fully account for its weapons of mass destruction.

The greenback, which has careened past key technical levels on its way down against the euro, is likely to come under pressure again next week. Analysts said sentiment has shifted away from the dollar, which never quite found its footing after last week’s shock resignation of U.S. Treasury Secretary Paul O’Neill.

Risk aversion and geopolitical issues, plus concerns about the deficit and the new economic team, are taking the dollar lower, said David Leaver, chief dealer at GAIN Capital in Warren, New Jersey.

The dollar hit key technical levels at 122.40 yen, 1.4525 Swiss francs and $1.02 versus the euro, which accelerated its decline, he said.

While the current account deficit narrowed in the third quarter, most traders and analysts believe the trend of a widening deficit is still intact.

Analysts say they expect the Republican-led Congress to pass the Bush administration’s tax cut package. The result most likely will boost the economy, as well as demand for foreign products. But the outflow of cash to pay for goods and services will keep the dollar under pressure.

Speculation about US commitment to its “strong dollar” policy, along with pervasive concerns about the sluggish US recovery from last year’s recession and fears that the United States may launch a military attack against Iraq, have already hurt the US currency.

The University of Michigan’s preliminary consumer sentiment index for December rose to 87.0, above market expectations of a more modest increase from November’s final 84.2 reading. The survey reassured economists that Americans’ robust spending, which helped cushion the US slowdown, will likely continue.

The euro climbed to a near three-year high of $1.0259 before the Michigan report caused a short-lived reversal. By the close of New York trade, one euro bought $1.0236, a gain of 0.51 per cent from Thursday’s North American close.

The dollar fell to a one-month low of 120.30 yen before steadying near 123.47 yen, still down a 1.81 per cent from the previous US close. The euro dropped to a two-week low of 122.91 yen before taking back some ground to 123.41 yen, a loss of 1.27 per cent on the day.

Weak US stocks and bonds also contributed to the dollar weakness, GAIN’s Leaver said.

The yen’s rally started in early Asian trade after Japan released stronger-than-expected economic data prompted traders to bail out of long-dollar/short-yen positions that had built up in recent weeks amid deep pessimism about Japan’s economic prospects.

It’s just a latest chapter in the long history of yen positioning, where it is always so tempting to be short yen on a weak Japanese economy; it always makes fundamental sense, said Sean Callow, currency strategist at IDEAGlobal.

But with offsetting factors, such as Japan’s current account surplus and investor risk aversion, if everyone is positioned the same way, it becomes very easy for the yen to turn quickly to strength, leaving you with big swings on dollar/yen, Callow added.

The Bank of Japan’s quarterly “tankan” survey — with the key diffusion index of sentiment at large manufacturers improving to minus nine in December from minus 14 in the September survey — beat a Reuters poll forecast of minus 13.—Reuters