Dollar dives as Iran tension mounts

The Brunei Times

By Eric Burroughs



THE dollar retreated to a two-month low against the euro on Monday as the US currency came under pressure on renewed worries about Iran's nuclear programme.

The dollar's latest slip was partly due to the surge in gold and oil prices as Western powers were set to meet in London to discuss tightening sanctions on Iran amid a flurry of tough talk between Washington and Tehran.

Gold prices, which tend to move inversely with the US dollar, rose 0.6 per cent to US$686.45 after hitting a nine-month high of US$688.20 on Friday.

"Middle East tension is certainly a pressure for the dollar, and as long as uncertainty lingers, it may continue to hurt the currency," says a Japanese bank trader.

But traders also said they didn't expect a sustained dollar move based on the Iran situation alone, especially with a slew of indicators this week on US growth, manufacturing and inflation that will help shape expectations on the interest-rate outlook.

The dollar has been hurt as investors believe the Federal Reserve is likely to trim rates from the current 5.25 per cent later in the year, even as the European Central Bank seems set to raise rates further next month to 3.75 per cent from 3.5 per cent.

So far Fed officials have indicated that they are wary of inflation pressures picking up further and not considering cutting rates anytime soon.

Activity was light with little major economic data set for release in the US or Europe this session.

The euro climbed to US$1.3192 , the highest since January 3, and held near that level to be up 0.2 per cent from late New York trade last week.

The US dollar inched down to 1.2298 Swiss francs, near a two-month low of 1.2295 francs on Friday.

The New Zealand dollar hit a two-month high of US$0.7096 after data showing stronger business confidence reinforced expectations for the country's central bank to lift rates next week to 7.5 per cent from 7.25 per cent, already the highest among industrialised countries.

The kiwi was close to hitting a 14-month high above US$0.7098.

The US currency dipped slightly to ¥120.89 after rising as high as ¥121.64 last week, back near the four-year high of ¥122.20 hit in January.

The US dollar's inability to rise beyond the mid-¥121 zone last week was prompting market players to take profits.

"People are cautious about keeping long dollar positions, so we are starting to test lower," said one trader at a US investment bank.

The euro was little changed near ¥159.35, near an all-time high of ¥159.63 struck last week and eyeing the ¥160 mark.

The minutes of the Bank of Japan's (BoJ) January meeting at 0500 GMT are likely to get only brief attention after the BoJ raised rates last week to a decade-high of 0.5 per cent.

The yen slid to new record lows against the euro last week despite the BoJ's move as the central bank is seen taking at least six months or more before lifting rates again.

A wide array of investors have used the cheap yen as a source of funds for buying higher-yielding currencies in the carry trade, while Japan's low rates have also prompted domestic investors to see better returns in foreign assets.

Iran tension also affected oil prices which rose for a fourth day on Monday, nearing a fresh 2007 high above US$61 a barrel as world powers prepared to consider tightening United Nations sanctions against Iran, the world's fourth largest oil exporter.

US crude was trading 32 cents higher at US$61.46 a barrel by 0200 GMT, adding to a more than US$2 a barrel rally built on an unexpectedly deep decline in US fuel stocks and pipeline and refinery glitches, on top of the growing geopoliticial worry.

London's Brent crude was up 41 cents.

Friday's US$61.80 peak was the highest price since December 26, 2006 marking a recovery from the early-January slump that knocked oil to a 20-month low of US$49.90 a barrel amid exceptionally warm US weather and a lack of fund buying.

The rebound has been supported by gradually tightening fundamentals, and by the revival of concerns over a possible disruption of Iran's oil supplies after the latest UN deadline for Tehran to halt its nuclear programme went unheeded.

"Iran is a key factor for oil prices recovering from just below US$50. However, it is a psychological factor and many market players are sceptical at the same time," said Tetsu Emori, the chief strategist at Mitsui Bussan Futures.