Dollar may not benefit from war against Iraq - Morgan Stanley

A war against Iraq may not help the dollar as much as it did during the 1990-91 Gulf Crisis, according to research published this morning by Morgan Stanley.

The heavyweight US broker reckons that two of the three factors that might have been positive for the dollar - oil and geopolitical - may no longer be that positive, leaving only economic safe haven flows as dollar positive factors.

Morgan Stanley argues that oil prices may not rise if the US attacks Iraq, adding that the dollar may not benefit even if they do.

"Global demand is weak, and is not in a position to push oil prices significantly higher than the current level," the broker said. "Even if oil prices do rise on a war in Iraq, it is far from clear that the dollar will be a beneficiary."

In addition, Morgan Stanley argues that the dollar may no longer be the dominant geopolitical safe haven currency.

"The nature of the current conflict is very different from previous wars and we suspect that the US's position as a geopolitical safe haven may have been tarnished by the terrorist attacks," Morgan Stanley said.

However, the dollar can draw from its status as the dominant economic safe haven currency, it said.

"A military conflict could raise the risk of a double-dip in the global economy," it said. "US Treasuries are still the supreme safe haven asset for economic risks, in our view."

Motgan Stanley insisted that war in Iraq is not incorporated as a central case in its forecasts but is necessary to be considered given recent events and comments from President Bush.