TOKYO, March 31 - The dollar slumped to a two-week low against the yen and the euro on Monday with the outlook for the greenback hurt by increasing pessimism that war in Iraq would end quickly and worries about the U.S. economy. Faced with stiff resistance from Iraqi forces, U.S. troops were apparently in no rush to take the fight to Baghdad, although air strikes on the Iraqi capital continued and U.S. officials said the campaign was going to plan. With little by way of bright news on U.S. economic fundamentals, many global investors are worried that a longer war will also lead to an increase in U.S. fiscal spending, making them wary of investing in the world's biggest economy.
"The situation in Iraq is still unclear and investors are afraid to buy dollars now, so we're seeing a shift in assets to euros," said Takashi Toyahara, forex manager at Nomura Securities. The euro rose to a two-week high of $1.0832 from $1.0785 in late U.S. trading on Friday. At 0538 GMT, the euro stood at $1.0829/32. Against the yen, the dollar also fell to a low of 119.20 yen , the lowest level since March 19. It now stands at around 119.21/24 yen. Dealers said the dollar was likely to stay vulnerable to any news indicating a prolonged war. Mitsuru Yaguchi, a senior fixed income strategist at Mitsubishi Securities, expects the euro to go as high as $1.11 in the near term. "The market is shifting back to what it was focusing on two or three months ago, and that's the twin deficits in the U.S. and its economy," he said. The twin deficits are in the budget and current account. Earlier this month, the single currency rose to $1.1084, its highest level against the dollar in four years. Analysts said Japanese institutional investors are expected to start putting their money into higher-yielding foreign bonds, including U.S. Treasuries, which may support the dollar's downside. But, with worries about U.S. fiscal spending, which could push up Treasury yields, Japanese investors could show a greater appetite for European bonds. "I hear that Japanese institutional investors are showing interest especially in countries other than Germany due to their banking woes and fiscal status," said a foreign bank trader.
MARCH INTERVENTION VOLUME
Prior to local commercial fixing at 0100 GMT, the dollar rose to a high of 120.20 yen on speculation that Japanese monetary authorities wanted to push up the dollar/yen rate above 120 yen at the end of this buiness year on Monday. Market sources said on Friday that Japanese monetary authorities had conducted dollar-buying intervention in London and New York trading hours last week, continuing this year's pattern of covert intervention. The Bank of Japan is scheduled to release data at 7 p.m. (1000 GMT) showing how much Japan spent on currency intervention in March. Analysts said Japan likely spent 1.0-1.3 trillion yen ($8-$11 billion) on dollar-buying intervention in the foreign exchange market in March after spending about 513 billion yen in February and 678 billion yen in January.
The March figure will include the last two business days in February, and market participants widely suspect Japan conducted intervention on those two days. Koji Fukaya, chief currency analyst at Bank of Tokyo-Mitsubishi said Japan most likely spent about 500 to 700 billion yen on those two days in February alone. On February 27, the greenback dropped to 116.85 yen. "My impression is that Japan spent about a total of 2.5 trillion yen during the January-March period," Fukaya said. "In late February, the yen was already at a high level and the dollar's outlook was increasingly weak due to Iraq jitters, so authorities seemed to have wanted to take pre-emptive action," he added. Japan has been selling its own currency since 1999 and the latest intervention will increase Japanese external reserves, which were already at a record high of $485.265 billion at the end of February, more than twice as high as in January 1999.//