Weak dollar could lead to currency war

EUROPEAN Central Bank president Jean-Claude Trichet described the growing weakness of the dollar against the euro as “unwelcome” to the ECB.

His strong verbal intervention for the second time in a week is raising concerns that a currency war could hit the markets if the dollar’s demise isn’t halted.

Fear’s are growing that unless the US authorities act to halt the dollar’s dramatic slide Japan and the eurozone economies could be forced to intervene against the wishes of the US administration.

From Alan Greenspan down, the US administration has indicated its desire to see the dollar slide lower for the next 12 months at least.

Concerns grew over the weekend as the euro rose above $1.33 for the first time since the launch of the currency in January 1999.

The difficulty is this. The dollar tumbled to record lows last week across all currencies, as concerns about America’s current and trade deficits dominated investor concerns.

By mid-afternoon yesterday the dollar’s slide eased somewhat as investors anticipating some intervention to halt the slide bought back into the greenback. As a result the dollar eased somewhat in trading yesterday to slide from $1.3289 late on Friday to $1.3255 by mid-afternoon yesterday.

“In general the intensity of intervention warnings and expressions of official displeasure continues to rise and appears the main catalyst for the corrective moves now underway,” said Steve Pearson, currency strategist at Halifax Bank of Scotland.

Despite this rally strategists point out that if the US is to tackle its huge deficits then it has no choice but to let the dollar’s slide continue. The dollar hitting $1.40 is not being ruled out by the markets.