London, March 19 (Bloomberg) -- The dollar may fall after the Federal Reserve said the prospect of war in Iraq prevented it from gauging the risks facing the U.S. economy, raising concern economic growth will remain sluggish in coming months. Fed policy makers declined to say whether the main risk to the economy is slow growth or inflation, the first time it has failed to do so since it began publishing the view in 2000. It left its key lending rate at 1.25 percent, a 41-year low. ``On the eve of war the central bank did not want to show it was apprehensive about growth,'' said Michael Turner, who helps oversee $12.8 billion at Edinburgh Fund Managers. ``The dollar won't rise until a resolution of the Iraq situation, and then it will depend on the performance of equities.'' The U.S. currency was at 118.76 yen at 9:23 a.m. in London, from 118.87 yen late yesterday. It was at $1.0639 per euro, from $1.0636 yesterday, when it traded as high as $1.0543.
The Fed blamed a ``hesitant'' economic expansion on rising oil prices and geopolitical events. ``The committee does not believe it can usefully characterize the current balance of risks with respect to the prospects'' for growth and price stability,'' it said. ``The Fed's failure to characterize the risks amounts to an abstention,'' said Mark Cliffe, chief economist at ING Barings. ``That leaves the Fed's options open and nothing is ruled out'' on interest rates. The Federal promised ``heightened surveillance'' of the economy, boosting speculation it will reduce the overnight rate for lending between banks before its next meeting May 6. Housing starts fell last month by the most in nine years, a report yesterday showed, and data tomorrow may indicate the job market is weakening.
`Economy Still Shaky'
``The Fed decision shows the U.S. economy is still shaky and may require further rate cuts this year,'' said Takeo Okabe, senior foreign exchange manager at Resona Bank Ltd. in Tokyo. ``Housing starts were bad as well, and both are putting pressure on the dollar,'' which may fall to 118.40 yen today, he said. The Commerce Department yesterday said builders broke ground on new homes at an annual rate of 1.622 million units last month, down 11 percent from January's 1.822 million, the latest sign the economy is slowing as consumers and businesses drop spending. The Labor Department is expected to report on Thursday that the number of U.S. workers filing new claims for state unemployment benefits last week totaled 415,000, based on the median of 26 forecasts in a Bloomberg News survey. That would compare with 420,000 the prior week and mark the longest series of readings above 400,000 since March-May of last year. U.S. retail sales fell in February by the most since November 2001, a report last week showed.
`Holding Back'
Any fall in the dollar may be limited by expectations a war against Iraq will start this week and end in a quick victory, boosting business and consumer confidence, and drawing investment into the world's largest economy. U.S. stocks yesterday rose for a fifth day, giving the Standard & Poor's 500 Index and Dow Jones Industrial Average their longest winning streaks in almost two years. The S&P 500 rose 0.4 percent, while the Dow gained 0.6 percent. Stock futures today were lower. ``The market is in a transition period from a weaker dollar before the war to a post-war rally,'' said Toru Umemoto, a foreign exchange strategist in Tokyo at Morgan Stanley, the seventh- biggest trader in the $1.2-trillion-a-day currency market. A quick end to the war ``will bring oil prices down and send the U.S. stock market much higher,'' and may push the dollar as high as 95 U.S. cents against the euro and 130 yen in the next three months, he said.
Mizoguchi
Any rise in the yen may be limited after Zembei Mizoguchi, vice finance minister for international affairs, welcomed the currency's 2 percent fall since reaching an eight-month high of 116.35 yen against the dollar on March 7. ``The excessive rise in the yen has been rolled back and this is what we anticipated,'' Mizoguchi said. Bank of Japan Governor-designate Toshihiko Fukui yesterday told a parliamentary committee he would allow a weaker currency, fueling speculation Japan will sell yen for a third month to halt a 10 percent rally in the past year that has crimped exports. The government sold 1.2 trillion yen ($10.2 billion) in January and February. Japan and the U.S. ``will take coordinated measures'' if the currency and stock markets are affected by a war in Iraq, Chief Cabinet Secretary Yasuo Fukuda said. Cabinet adviser Haruhiko Kuroda and U.S. Treasury Secretary John Snow met last week, and ``talked about the necessity of taking crisis management measures in currency and stocks markets,'' Fukuda said. In other trading, the dollar was at 1.3832 Swiss francs from 1.3828 francs. The British pound was at $1.5660 from $1.5667. The yen was at 126.18 against the euro, from 126.39.//www.quote.bloomberg.com