London, Feb. 4 (Bloomberg) -- The dollar fell for a second day against the euro as some investors bet U.S. Secretary of State Colin Powell will present evidence to the United Nations that will make a war with Iraq more likely. The dollar dropped to $1.0799 per euro at 10:05 a.m. in London from $1.0770 yesterday. It has shed 2.5 percent against the euro this year and 20.3 percent in the past 12 months. Last week it fell to $1.0905, its lowest since October 1999. The yen was little changed at 120.26 per dollar from 120.32. Powell tomorrow is scheduled to appear before the United Nations Security Council to present what he called ``compelling'' evidence that Iraq has weapons of mass destruction. A war may weaken the dollar by crimping U.S. consumer confidence and economic growth, as well as prompting international investors to keep their funds at home for safety, investors said.
``Whenever the outbreak of war is seen to be closer, it hurts the dollar as it makes it harder'' for the U.S. to attract enough foreign capital to offset its current account deficit, said Markus Krygier, head of investment strategy at Credit Agricole Asset Management, which oversees $160 billion. Credit Agricole has been selling dollars for euros and Australian dollars, he said. The U.S. needs $1.4 billion a day to make up for the shortfall in its current account, the broadest measure of international trade, analysts estimate. In the first three quarters of 2002, the current-account gap widened to $367.1 billion, compared with $393.4 billion for all of 2001. A possible conflict ``makes international investors less inclined to invest abroad,'' said Rob Hayward, a currency strategist at ABN Amro. He expects the dollar to end the quarter at $1.09 per euro.
Iraq
Under a UN resolution passed in November, weapons inspectors are in Iraq. Hans Blix, head of the weapons team, said last week said Hussein's regime may be developing VX nerve gas. Iraq hasn't accounted for its anthrax stocks and is deploying illegal missiles, Blix also said. The U.S. said the report made military action more likely. The dollar may drop to $1.15 this year, said Credit Agricole's Krygier.
``There's just too much nervousness over what is going to happen in Iraq to keep buying the dollar,'' said Noriaki Masuda, a currency trader at UFJ Bank Ltd. in Tokyo. ``Powell's speech at the UN is going to keep weighing on the dollar,'' which could fall to 119.80 yen today, he said. U.K. Prime Minister Tony Blair will try today to persuade French President Jacques Chirac to drop his opposition to disarming Saddam Hussein's Iraq by force. France and Germany have said weapons inspectors should be given more time to work.
Gold
The price of gold, a traditional haven in times of political crises, rose to a more than six-year high of $376.75 an ounce. Gold prices have risen 30 percent in the past year. The dollar also weakened after President George W. Bush yesterday said the budget deficit will almost double this fiscal year to $304 billion, or 2.8 percent of gross domestic product, said Hayward at ABN Amro. ``There has been a sharp decline in U.S. finances,'' he said. The government is increasing its deficit projection as it plans to cut taxes and boost spending, while preparing for a possible war with Iraq, analysts said. In the 2004 budget Bush sent to Congress yesterday, he proposed spending of $2.2 trillion that would widen the shortfall next year.
Defense
The cost of an extended defense against terrorist threats has combined with the past stock market bubble, high personal debt, and a large trade deficit to leave the U.S. economy and its currency vulnerable when foreigners decide to withhold investment, said Bill Gross, who manages the world's largest bond fund at Pacific Investment Management Co. The dollar's fall against the yen may be limited after Finance Minister Masajuro Shiokawa said the Bank of Japan sold about 700 billion yen ($5.82 billion) of its currency in January ``to give a warning'' to the currency market. Shiokawa told parliament that Japan will ``keep a close watch'' on the yen against the dollar should there be a war in Iraq. ``The Bank of Japan could continue to sell yen and the market is becoming very respectful of that,'' said Michael Jansen, market strategist at National Australia Bank in Sydney. The yen has risen about 12 percent in the past year, eroding earnings of exporters such as Canon Inc., which makes three- quarters of its revenue abroad. About 11 percent of Japan's economy, the world's second-largest after the U.S., comes from exports of goods and services, according to World Bank figures.
Falling Confidence
The euro's rise may also be limited after a report showed French consumer confidence fell to a five-year low in January, analysts said. The dollar may also gain on speculation U.S. factory orders increased 0.3 percent in December after declining 0.8 percent in November, economists surveyed by Bloomberg News expect a report at 3 p.m. London time to show. Recent economic reports have suggested a recovery in the U.S. is gathering pace, some analysts said. U.S. manufacturing expanded for a third month in January while construction spending rose in December. ``Given there's already so much bad news priced into the dollar, what with concerns about a war and the economy, another couple of pieces of good data from the U.S.'' could boost the currency over the next six weeks, said Jesper Dannesboe, chief foreign-exchange strategist at Dresdner Kleinwort Wasserstein. //www.quote.bloomberg.com