LONDON, Jan 21: The dollar edged higher on Tuesday, but analysts said the modest gains were likely to be a mere blip in a downward trend in the US currency driven by worries about the US economy and possible war in Iraq.

The dollar rebound was also capped by some rays of optimism seen in euro-zone economic data, including the first rise in seven months in a closely watched German confidence index from the ZEW economic research institute.

The single European currency slipped to 1.0649 dollars against 1.0667 late on Monday in London. New York markets were closed Monday for a public holiday.

The dollar also rose to 118.86 yen from 118.16.

Analysts say that the dollar’s decline is unlikely to be smooth because speculators hold large short positions — when they have sold borrowed dollars in the expectation of a fall in the value of the currency. Concerns about the US economy and its current account and budget deficits, and growing worries about a US-led war in Iraq, analysts expect the dollar to remain under pressure.

I think the market is disappointed about the performance of the US economy, said Barclays Capital economist Jane Foley.

Then we add to that the concerns about potential war in Iraq, the United States’ worsening double-deficit problem, and it doesn’t inspire too much dollar confidence, she added.

Dealers were also mulling some signs of improvement in euro-zone economic data, including a rise in the ZEW institute’s economic expectations index by 13.4 points to plus 14.0 points in January.

The confidence barometer is based on a poll of 323 analysts and institutional investors, and it was the first time since June 2002 it has risen.

It’s the first glimmer of hope on the horizon, said ZEW President Wolfgang Franz.

But he added: There are of course still substantial risks, such as the outcome of the Iraq crisis and German economic policy.

In Brussels meanwhile, EU finance ministers approved an excessive deficit procedure against Germany and urged the bloc’s biggest economy to get its finances in shape as soon as possible.

They also issued France with an “early warning” over its bulging budget deficit, but French Finance Minister Francis Mer resisted his colleagues’ demands that he fix his government’s finances.

The euro was changing hands at 1.0649 dollars from 1.0667 late on Monday in London, 126.70 yen (126.04), 0.6632 pounds (0.6643) and 1.4615 Swiss francs (1.4608).

The dollar was being quoted at 118.86 yen (118.16) and 1.3712 Swiss francs (1.3693).

The pound was at $1.6058 (1.6067), 190.93 yen (189.82) and 2.2046 Swiss francs (2.2001).

On the London Bullion Market, the price of an ounce of gold eased to $354.98

from 355.85 late on Monday.—AFP