18 December 2002, 08:23  Dollar hit by fears of imminent war with Iraq

/www.fxserver.com/ There were violent moves on financial markets yesterday as traders gambled that an attack on Iraq is now imminent and will be accompanied by an end to the stong dollar policy to boost the US economy.
The dollar plunged against all major currencies. At one point the pound jumped through $1.60 for the first time since April 2000, but it closed just short at $1.5983. The US currency also weakened sharply against the euro and the single currency closed up a cent at $1.0294.
The most conspicuous beneficiary of the dollar's weakness was gold, which soared $6.40 to $339, a five-and-a-half-year high.
Speculators poured funds into the precious metal, a traditional safe haven in times of trouble. Much of these flows were apparently from Japan where the banking system is creaking with bad debts, losing the trust of many local investors.
After the market closed in London the White House took action to try to stem the dollar's fall. "Our policy is unchanged: We support a strong dollar and believe that growth policies lead to a strong dollar," said a spokesman.
There is, nonetheless, widespread speculation that John Snow, and Stephen Friedman, President Bush's economic adviser, will abandon the strong dollar policy and propose more tax cuts.
Alan Greenspan, president of the US Federal Reserve, has done all he can to stimulate the economy by cutting interest rates to 1.25pc.
Now it is the turn of the Federal Government to act. The so-called "war premium" has also returned to financial markets.
The Iraqi military reportedly opened fire yesterday on allied aircraft and the Ministry of Defence began preparations for an American-led expedition to the Gulf.
The oil price, which has risen steeply in the past few weeks as the so-called "war premium" returns, dropped back slightly. The benchmark price for a barrel of crude for delivery in January traded down 22 cents to $27.84.
The dollar's decline was given added momentum by inflation figures from the US which showed core annual price increases falling from 2.2pc in October to 2pc.
Stephen Hull, a senior economist at Goldman Sachs, said: "On any day when gold rises like this you have to say markets are worried because it is always a safe haven. But really it is a dollar day.
"The market believes that President Bush's new economics team is going to abandon the strong dollar policy in place since 1995 and take steps to reflate the economy."
In Britain, there was a surprising upsurge in inflation in November, said the Office for National Statistics. Prices are climbing at the fastest rate for four and a half years as the effects of the housing boom and the rapid increase in government spending filter through.
The key measure of inflation targeted by the Bank of England, known as RPIX as it excludes mortgage interest payments, shot up to 2.8pc in November, a level unseen since 1998. That was up on 2.3pc in October and ahead of forecasts of 2.7pc.
Its surge also shattered the Bank of England's 2.5pc RPIX target and economists said that inflation's surprising strength puts paid to any hope of further interest rate cuts. It is the third consecutive month that inflation has come in ahead of forecasts.
John Butler, an economist at HSBC, said: "UK inflation is back above target. That has happened twice in the past two years but, unlike those occasions, this latest rise will not prove temporary.
"In our forecasts RPIX inflation is likely to stay above target throughout 2003 as the effects of lower petrol and food prices unwind."

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