12/27 08:12
Dollar Heads to Fourth Weekly Drop vs Euro on Iraq War Concern
By Geraldine Ryerson-Cruz New York, Dec. 27 (Bloomberg)

The dollar is headed toward a fourth weekly drop against the euro on concern military conflicts with Iraq and North Korea would derail a global economic recovery and spark terrorism against the U.S.

"The dollar looks like it is in the doldrums,'' said Monica Fan, a senior currency strategist at RBC Capital Markets in London. With further "deterioration in the global political situation, the euro could spike up to $1.06.''

The U.S. currency was at $1.0379 per euro at 8 a.m. in New York, little changed from $1.3075 late yesterday. Earlier it traded at $1.0397, its weakest since Jan. 6, 2000. The dollar was little changed at 119.93 yen per dollar from 119.96.

For the week, the dollar shed 1 percent of its value against the euro and 0.4 percent against the yen. Trading is below average as many investors have taken time off for the Christmas holidays, traders said.

Some foreign investors are shifting less money to U.S. assets, damping demand for the currency, on the prospect President George W. Bush will lead a war against Iraq, analysts said. The largest economy's current account deficit, the broadest measure of trade, means the U.S. must attract almost $1.4 billion a day from abroad to sustain the dollar's value.

Concern about war will keep the euro above $1 through the end of March, according to 76 percent of the 51 currency analysts surveyed by Bloomberg News. Almost three quarters of those polled see it at that level at the end of 2003.
North Korea

Escalating tensions with North Korea may also hurt the dollar. North Korea expelled United Nations nuclear inspectors, Yonhap News reported, citing the country's Chosun Central Broadcasting Station.

Speculation is mounting that the U.S. may be drawn into another conflict as North Korea flouts its 1994 agreement to freeze production of nuclear fuel. Defense Secretary Donald Rumsfeld last week said the U.S. can fight two wars at the same time.

"Iraq is one problem and North Korea is not helping at all,'' said Paul McNee, chief currency trader at Australia and New Zealand Banking Group in Melbourne. "Investors are getting jittery.'' The dollar may fall to $1.04 per euro today, he said.

Gains in Japan's currency may be limited by expectations the government will sell yen to stem its currency's rally and help bolster exports. A report showing industrial production fell in November for a third month, indicating an economic recovery is faltering, may also push the yen lower.

Yen

Finance Minister Masajuro Shiokawa said Japan would "have to take action if the yen gets stronger,'' echoing earlier comments by his deputy, Haruhiko Kuroda.

The Bank of Japan may sell the currency if it strengthens to 119 or 118 yen against the dollar, said RBC Capital Markets's Fan.

Currency sales by the Bank of Japan would add to the 4 trillion yen it sold over seven days in May and June, a record for one quarter. The last time the bank sold was on June 28, when the dollar traded between 118.40 yen and 120.26 yen.