Poor manufacturing sector results hits dollar

FINANCIAL markets had a mixed day yesterday as a survey showing weakness in the manufacturing sector in the US saw the euro/dollar ratio hit another four-year high by mid-afternoon.

The results of the Institute of Supply Management’s monthly survey of US manufacturing activity saw the euro climb over the $1.12 mark in the afternoon to hit $1.1260. On Thursday, the exchange between the two resulted in a further four-year high being archived.

Analysts think the gains may be lost next week. Jeremy Peat, group chief economist of Royal Bank of Scotland, says a rate of $1.10-$1.11 is a fair exchange given the inherent weakness in eurozone economies.

With the US expected to lead the global recovery expected in the second half of 2003, Mr Peat said $1.10 looked reasonable.

Ulster Bank Markets chief economist Niall Dunne said the sustainability of dollar weakness in the weeks ahead depends on investors’ opinion on the impact of the Iraq war. If they think it will hit recovery then the dollar will weaken, he said.

Mr Dunne’s expects the economy to pick up in the second half. There are signs of some bounce in consumer confidence but the business factor is missing, he said.

But he shares the view of Mr Peat that the US will lead the recovery and the present exchange rate is out of line with the potential economic growth in the two zones.

As pointed out previously, the eurozone will do well to grow by 1% this year, but that is contingent on the European Central Bank showing same further initiative on interest rate reductions.

On balance, Mr Dunne expects the rate of exchange to stay around the $1.10-12 range.

But if anything Mr Dunne expects some further strengthening of the euro to levels of around $1.14 unless US sentiment improves dramatically in the weeks ahead.