LONDON, Sept 17: The dollar rallied on Tuesday after Iraq agreed to the unconditional return of UN arms inspectors, a move that sent stock markets soaring and oil prices plunging, giving a much-needed boost to the US economy.

The single European currency fell to $0.9613 from $0.9693 late on Monday in New York.

The dollar climbed to 123.38 yen from 122.21 yen on Monday.

Iraq agreed late on Monday to renewed US weapons inspections amid intense diplomatic pressure to head off US threats of war over Baghdad’s suspected weapons programmes.

We saw equity markets doing very well, we saw the oil prices coming off,

Everything we can expect from a diminished risk of US attacks on Iraq, said Citibank economist Steven Saywell.

He added that given the fact that the risk has diminished, we’ll see a rebound in the dollar.

Bank of Tokyo-Mitsubishi economist Derek Halpenny said that Iraq’s announcement had given the dollar a lift as market participants unwound further the risk premium related to war in the Gulf region.

Although the financial markets remain sceptical of the Iraqi announcement in averting war altogether, the announcement has reduced significantly the prospect of imminent war, he wrote in a research note.

Saywell at Citibank said that the dollar could rebound further in the short term.

The economic prospects in the United States are not that great but they are better than in Europe, he said.

In Japan meanwhile, the Bank of Japan started a two-day policy meeting Tuesday while Chief Cabinet Secretary Yasuo Fukuda said the government hoped the bank would “take effective and bold action on monetary policy” to fight deflation.

But the bank will unlikely come up with effective anti-deflation measures, said Satoru Ogasawara, foreign exchange strategist at Credit Suisse First Boston in Tokyo.

Sterling was weaker against the dollar in line with other currencies. Official figures showed that underlying British inflation slowed to 1.9 per cent in the year to August from 2.0 per cent in July.

Underlying prices rose by 0.3 per cent in August from a month earlier. The figures, which were in line with economists’ expectations, left the annual inflation rate comfortably below the official 2.5-per cent target.

The euro was changing hands at 0.9613 dollars against 0.9693 late on Monday in New York, 118.61 yen from 118.45, 0.6287 pounds (0.6288) and 1.4708 Swiss francs (1.4687).—AFP