Currency Trading Dollar Slips Against Key Rivals As War Progress Stays Elusive
[ Dow Jones & Company, Inc. 27th March 2003 ]

By Michael Deibert, Dow Jones Newswires

NEW YORK -- The dollar slipped moderately against its major rivals as developments in Iraq failed to give traders a feeling of definite progress toward a resolution to the conflict.

As coalition forces pushed toward Baghdad, there were some reports of a division of the elite Iraqi Republican Guard moving rapidly south toward the U.S. Seventh Calvary division near the central Iraqi city of Najaf.

This only reinforced a sense in currency markets that the war could be longer and more messy than many investors have been anticipating and left investors reluctant to take out extreme trades, one way or another.

"At this stage it's hard to find something that would severely displace focus on the war," said Robert Lynch, a currency analyst with BNP Paribas in New York. "The market is becoming a bit more accustomed to the situation that we're in -- not overly enthusiastic that things will end immediately but not overly pessimistic that things will drag on indefinitely."

On the war front, U.S. units in central Iraq appeared to be shifting their strategy because of the attacks from Iraqi militia. Instead of racing to Baghdad, some units were moving slower to clear out pockets of opposition.

That, along with the discovery of 3,000 chemical protection suits in a provincial Iraqi hospital, reinforced concerns that Iraqi President Saddam Hussein might be preparing to use chemical weapons against coalition forces, increasing the potential for casualties.

Putting to an end to any hopes the U.S. could win an easy victory in Iraq, President Bush also warned that the fighting there is "far from over."

In line with the dollar's declines, other key global asset markets reflected a muted rise in risk aversion associated with the war. The price of gold rose to $ 330 per ounce late yesterday, up from $328.25 per ounce late Tuesday, while crude-oil futures for May delivery in New York rose 70 cents on the session to $ 28.70 per barrel.

Late yesterday, the dollar was at 120.06 yen, modestly down from 120.15 yen late Tuesday in New York. The euro was at $1.0687, up modestly from $1.0655 late Tuesday. Against the Swiss franc -- a classic refuge currency in times of military conflict -- the dollar was at 1.3820 francs, down from 1.3827 francs. Sterling was at $1.5748, up from $1.5726.

In view of the developments on the war front, U.S. economic reports were very much a sideshow. These included yesterday's report that new orders for durable goods fell by 1.2% in February, a weak report in itself; some of the closely watched details of the data were weaker.

Among Latin American currencies, the Argentine peso hit a fresh 11-month high, trading at 2.8952 pesos to the dollar, from a close of 2.9351 pesos on Tuesday.

The peso's gains were fueled again by a steady flow of dollar sales by Argentine exporters. That means the peso has rallied 7.4% against its U.S. counterpart since the beginning of last week and is up 15.3% on the year to date.

Among the factors driving the peso higher are the country's hefty trade surplus and continuing repatriation flows into pesos, said John Welch, head of Latin American research with WestLB in New York.

In Venezuela, bonds dropped sharply as President Hugo Chavez said the country needed to restructure its foreign debt as it deals with a cash crunch due to the fallout of a crippling general strike. The Venezuelan currency, the bolivar, is set at a fixed rate of 1,598 bolivars to the dollar.

John Parry in New York and Michael Casey in Buenos Aires contributed to this article.

Copyright (C) 2003 Dow Jones & Company, Inc. All Rights Reserved.


Questions:

  1. Why is the slow progress of the war affecting the dollar adversely?
  2. What is the relationship between exchange market movements, the price of oil and that of gold?
  3. How would you construct a portfolio consisting of these three assets that would have zero risk?