London, March 27 (Bloomberg) -- The dollar fell to a nine-day low against the euro on concern the U.S.-led war in Iraq may last longer than earlier expected, weighing on demand for the country's assets and the currency to buy them. The U.S. currency dropped to $1.0725 per euro at noon in London, from $1.0676 yesterday. It has shed 2 percent against the common currency this week, after rising 4.3 percent in the previous two weeks on optimism the war would be over quickly. The dollar weakened to 119.82 yen from 120.07 late yesterday. The war in Iraq is likely to last months and will require more combat power than is currently available, the Washington Post reported unidentified defense officials as saying. A more protracted war may dent the dollar by crimping U.S. consumer and business confidence, investors said.
Investors are realizing the war ``will take more time and money and that's forcing a reappraisal of the dollar's trend,'' said Tony Robinson, chief investment officer at Attica Asset Management, which runs $200 million in assets. He holds fewer dollars than his benchmarks suggest because he expects the currency to ``challenge $1.10 again fairly quickly,'' he said. The campaign to oust Iraqi President Saddam Hussein has entered its eighth day, as the U.S. sent paratroopers into northern Iraq to open a new front. Dozens of U.S. Marines were injured by friendly fire, which took place around the southern city of Nasiriyah, Agence France-Presse reported. A prolonged war in Iraq threatens to increase the price of oil, erode the confidence of investors, businesses and consumers, and undermine global growth, the International Monetary Fund said.
Skeptical
``Markets are more skeptical than they were at the end of last week'' about how long the war is likely to last, said Armin Mekelburg, a currency strategist at HVB Group in Munich. He said the dollar may weaken to as much as $1.08 per euro in coming days, though isn't likely to go much further than that ``as long as the short-war scenario still has the smell of a chance.'' U.S. economic growth probably slowed to a 1.4 percent annual pace in the fourth quarter, economists polled by Bloomberg News expect a report at 1:30 p.m. London time to show. Reports yesterday showed durable goods orders fell for the third month in four and new home sales declined to the slowest pace in more than two years. ``The longer it takes, the bigger the damage to the U.S. economy, and that hurts the dollar,'' said Motoshi Imura, senior manager of the foreign exchange and treasury division at Bank of Tokyo-Mitsubishi Ltd. The U.S. currency may fall to 119.60 yen today, he said.
Extra Spending
Bush asked Congress this week for $74.7 billion in extra spending this year to pay for combat costs, humanitarian aid and homeland security. The Senate approved a $2.2 trillion budget that slashed Bush's 10-year tax cut proposal by more than half to $350 billion. ``The prospect of a longer conflict, the recent weak economic data and smaller tax cuts are all weighing on the dollar,'' said Shohgo Nagaya, a foreign-exchange manager at Nomura Trust and Banking Co. in Tokyo. The dollar climbed back from its lowest level versus the yen amid speculation Japan may sell the currency to stem the gain in its currency. Vice Finance Minister for International Affairs Zembei Mizoguchi said Japan will act to quell large swings in the currency.
A stronger yen erodes the profits exporters earn on overseas sales. Exports account for about 11 percent of the Japanese economy. Japan sold 1.2 trillion yen ($10 billion) in January and February. The dollar has fallen 1.7 percent against the yen since reaching a three-month high of 121.88 yen on March 21. ``People don't want to push the dollar below 119.50 yen, where some speculate the authorities may come in,'' said Shigehiro Kamimura, market trading department manager at Resona Bank Ltd. in Tokyo. ``The dollar looks weak, but its decline should be limited to 119.50 yen today.'' //www.quote.bloomberg.com