Terror warning hits the dollar

THE dollar fell to a record low versus the euro in New York yesterday, after the US raised its security alert because of what officials called a “substantial increase’ in the potential for terrorism during the holidays.

Homeland Security Secretary Tom Ridge raised the alert to “high” from “elevated”. The dollar has weakened in the past six weeks against the euro and is headed for the biggest annual decline in the euro’s almost five-year history, down 15%, as higher interest rates in Europe lured investors.

“We are trapped in a dollar-softening trend,” and the heightened alert is “bad for the US dollar,” said David Durrant, New York-based chief currency strategist at Bank Julius Baer & Co., which has about $87 billion in assets.

Against the euro, the dollar weakened to $1.2414 at 11.31am in New York yesterday, from $1.2374 late Friday, according to EBS prices. Earlier, it reached about $1.2450, the weakest since the euro debuted in January, 1999, at about $1.17. The US currency also fell to 107.49 yen, from 107.81.

The dollar also declined to 1.2547 Swiss francs, from 1.2560. On September 11, 2001, the dollar dropped 2.7% against the franc and 1.7% versus the euro.

Gold rose as high as $412.50 an ounce on the terror alert increase.

With concern about an attack on the scale of September 11, “if you are a foreigner, you start pulling your money out of the US,” said Brian Taylor, chief currency trader in Buffalo, New York at Manufacturers & Traders Trust, which has $50 billion in assets. “Safety is definitely the key.”

The Federal Reserve’s key interest rate is at a 45-year low of 1%, half the European Central Bank’s.

The US Dollar Index, which tracks the dollar against a basket of six currencies, including the euro, British pound and Swiss franc, fell as low as 87.78 from 88.15. The index is down 14% this year.

This is the fifth time the US alert has been raised to orange since the system was created in response to the September 11, 2001, attacks. The threat has never been at red, blue for “guarded” or green for “low”.