Markets fall as Treasury chief resigns

US Treasury Secretary Paul O’Neill’s surprise resignation today caused a short-term shake on the markets, with the dollar sliding and equities wobbling - but the FTSE 100 Index managed to close off its lows with its head above the 4,000 mark.

Mr O’Neill’s resignation was swiftly followed by the departure of economic adviser Larry Lindsey – both of whom resigned at the request of the White House amid growing concern about the US economy.

Advisers to the president have been increasingly worried that a weak economy could hit his re-election prospects.

US markets were momentarily shaken following the news in early afternoon with the Dow Jones Industrial Average sliding more than 100 points minutes after opening – although analysts said the fall was mainly on the back of disappointing unemployment data.

But the initial shock wore off and by late afternoon the market was trading at around its opening level.

In London, the FTSE 100 Index slumped 100 points to 3931.9 on the back of the US news but then stabilised to close down just 18.9 points at 4013.5.

Currency markets reacted sharply – immediately after the dollar slid, falling to 1.0128 against the euro before recovering to 1.0074.

One analyst said: “The dollar was being sold off because of policy uncertainty in the US. The uncertainty is over who is going to come in to replace him, and when.

“He also had a strong-dollar policy and someone else may have a very different view. The market had a short-term shock driven by uncertainty but the longer term reaction will be a more considered one.”

Mr O’Neil constantly claimed that his policy was to keep the dollar high - although his critics say he did virtually nothing to promote the currency.

Some said that once over the surprise, the markets were treating the resignations as a positive story – Mr O’Neill had been a much-criticised figure.

“He put his foot in it on many occasions. To be honest, he had a terrible reputation,” one analyst said.

Nick Parsons, global head of currency research at Commerzbank, said: “The first reaction to O’Neill’s resignation – understandably – was a sell-off in the US dollar.

“But, on reflection, we should recall that O’Neill was a very ineffective Treasury Secretary. He offered no sound analysis of America’s economic problems, no understanding of the current situation and no ideas about how to fix them.

“In short, he constantly denied recession, overstated the recovery and served largely as a cheerleader for a stock market rally which has not happened. His resignation statement reads as if he was forced to write it; short, terse and to the point.

“Beyond the immediate news, we should look for his replacement. If indeed, he was forced out then a successor should be quickly announced. The longer the delay, the greater the uncertainty, but markets will look to someone with a sound background in academia or financial markets rather than another industrialist.”