The dollar had its biggest weekly loss against the euro in eight months on concern a protracted war in Iraq will curb demand for US financial assets including stocks.
While a weak dollar reduces the cost of US goods abroad, boosting exports and helping to promote growth, it also makes imports more expensive, potentially depressing spending and investment.
"The fear is US consumers and businesses will hold off spending" until the war ends, and that could take a couple of months, said Rebecca Patterson, global foreign exchange strategist at JP Morgan Chase & Co, the fifth-largest trader in the US$1.2 trillion-a-day currency market.
The dollar weakened to US$1.0784 at 5pm in New York from US$1.0685 late yesterday, and has shed 2.5 percent against the 12-nation euro this week, the most since June 21. It may lose value to US$1.12 in a few weeks, or sooner amid "negative developments such as the use of chemical weapons," Patterson said. The US currency had gained 4.3 percent the previous two weeks on optimism the war would end swiftly.
The dollar fell to ¥119.78 from ¥119.97 yesterday and is down 1.6 percent this week, the biggest drop since early November.
The US currency has lost almost 20 percent against the euro and 10 percent against the yen in the past 12 months.
"A weak dollar may translate into greater exports as it makes our goods more competitive," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. "That's all good given economic growth in the US seems to be on life support."
The sinking dollar has driven up sales in Europe for US companies including Deere & Co, the world's biggest farm equipment maker; Colgate-Palmolive Co, the largest maker of toothpaste; and Nike Inc, the No.1 athletic shoemaker.
Treasury Secretary John Snow earlier this month said he wasn't "concerned" about the dollar's decline as it weakened to US$1.10 per euro, its lowest value in almost four years.
Demand for dollars fell as Lieutenant-General William S. Wallace, the Army's senior ground commander in Iraq, told the Washington Post that enemy tactics raised the likelihood of a longer war than some strategists anticipated. Declines picked up after White House spokesman Ari Fleischer said Americans should be prepared for a fight that is "long, lengthy and dangerous." The 1991 Gulf War lasted about six weeks.
The US plans to bring in 90,000 more troops to support the 250,000 personnel in the Gulf region by next month, defense officials said this week. Iraqi troops may have been given their "first orders" on the use of chemical weapons, suggesting they may be used against coalition forces, said US Brigadier General Vincent Brooks said.
"A long, messy war will almost certainly be an unfavorable outcome for the dollar," said Michael Derks, a bond strategist in London for Commonwealth Bank of Australia. "A lengthy conflict will become increasingly expensive," hurting the economy. The bank forecasts the dollar weakening to US$1.11 per euro in a month.
Adding to evidence the US economy is stalling, the University of Michigan's consumer sentiment index fell to 77.6, the lowest in more than nine years, from 79.9 in February. US personal spending remained unchanged in February for a second month, the Commerce Department reported.
The economy expanded between October and December at about a third of the previous quarter's pace, hobbled by slower consumer spending that shows few signs of rebounding because of the war.
RSS