NEW YORK, Feb 22: The dollar rebounded from its lowest level in three weeks against the yen and pared losses against the euro and Swiss franc on Friday, as a rally in Wall Street shares fueled demand for the US currency.
Earlier in the day, markets were unnerved by news that a barge carrying unleaded gasoline in New York Harbor had caught fire and exploded. Though investors initially suspected it might be a terror attack, it became apparent that the incident was an accident.
Investigators were unsure of what caused the fire, but assured citizens it appeared accidental and not an act of terrorism.
The unknown and concern regarding the oil fire drove the stock market into negative territory, said Michael McGuinness, head of North American sales at American Express Bank. Once everybody saw it was a mishap ... and there was no terrorist activity associated with it, the stock market came back and with it came the dollar.
Major US stock indexes closed up more than 1 per cent on the day, as investors were cheered by the possibility war could be averted. An Iraqi official said Baghdad was “ready for dialogue with the American administration to build economic ties and cooperation” should the US drop plans to invade Iraq.
In late US trading, the euro changed hands at $1.0760 versus the dollar, 0.50 per cent lower than its prior US close.
A poor showing of UK retail sales data caused sterling to emerge as the session’s loss leader, falling to a four-year low against the euro at 68.29 pence and tumbling nearly 1 per cent against the dollar to stand at $1.58 in late US trading.
Against the yen, the dollar bought 118.70 yen, above Thursday’s three-week low at 118.06 and 0.32pc higher on the day.
Analysts said they do not expect a weekend meeting of finance ministers from the world’s seven richest nations in Paris to have a material impact. But US Treasury Secretary John Snow, in a meeting with French Finance Minister Francis Mer, repeated America’s long-standing “strong dollar” policy.
I don’t think anyone expects anything from G7 and, given the growing political rift between the US and the Europeans, you might not even get a photo opportunity, said Lara Rhame, US foreign exchange economist at Brown Brothers Harriman.
On Friday, the US consumer price index for January rose 0.3 per cent, as expected, while the core rate of inflation, which excludes volatile food and energy costs, rose 0.1 per cent, beneath the 0.2 per cent economists forecast.
One of the more important economic indicators on Thursday that helped push the dollar lower was the unexpected decline in US exports for December, which boosted the US trade deficit to a record for the month and the whole of 2002.
A weaker global economy could exacerbate the US trade deficit because it would lower demand for US exports. That would put more downward pressure on the dollar as demand for it slackens.
Traders said the possibility of a US-led invasion of Iraq will keep the dollar in a weak position for the time being. Next week, America and Britain are set to introduce a new resolution to the UN that authorizes military action against Iraq even as allies remain deeply divided.
The likely resolve appears to be a US/British invasion of Iraq. The dollar should weaken in anticipation of the likelihood of the war commencing sooner rather than later, which should keep the euro and Swiss franc bid against the dollar and sterling as well, said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.—Reuters