Dollar goes lower as trade tensions increase

The dollar touched a new low against the euro yesterday and analysts believe trade tensions are likely to keep the currency under pressure.

The euro hit $1.1977 at one stage yesterday, its highest level against the dollar since its launch in 1999. It fell back a little subsequently and was trading around $1.19 in New York late yesterday, but traders feel the US currency could face further selling pressure in the days ahead.

The latest bout of dollar weakness was sparked on Tuesday by an announcement that the US was imposing import tariffs on Chinese clothing and textiles.

The move, designed to protect jobs in US industry, has led to fears of escalating trade tensions which could affect prospects for US recovery.

It has also reinforced the view that the Bush administration will seek a lower dollar to boost US exporters.

Beijing yesterday denounced Washington's decision to limit import of Chinese-made dressing gowns, bras and knitted fabrics, saying it was a betrayal of World Trade Organisation principles that frame China-US trade relations.

A statement from the government said it expressed "very great regret and firm opposition" to the move. While it cancelled two planned trade delegation visits to the US, it did not threaten any direct retaliation.

The US move came in response to a surge in Chinese imports, which are being blamed for contributing to 2.5 million US factory job losses over the past three years. The US has said it will impose quotas limiting Chinese imports over the next three years unless Beijing agrees to voluntary export restraint.

As well as fuelling dollar weakness, the US move has also sent gold higher - to over $400 (€335.8) a troy ounce for the first time in seven years.

Italy has urged the EU to follow the US move, amid speculation that Chinese exports could be redirected from the US to Europe.

Also contributing to the dollar's woes was Tuesday's announcement of a fall in foreign capital investment in the US from $50 billion in August to $4.2 billion in September.

The decline, mainly due to a fall-off in overseas purchases of US bonds and securities, renewed fears that the US could find it difficult to attract continued capital inflows to finance its huge current account balance of payments deficit.

While a falling dollar would help to shrink the US current account deficit, it would make life more difficult for EU exporters - including Irish exporters - selling into the US market.

After its early slide against the euro, the dollar recovered a little in later trade. It also bounced back slightly from a three-year low of 107.58 against the yen amid unconfirmed reports that the Bank of Japan had stepped in to hold down the currency.

The outlook for the dollar remains volatile, according to Mr John Beggs, chief economist with AIB, with the risks in the short term "all skewed towards the downside".

The US currency looks vulnerable to news on a range of issues, he said, and investors were nervous in particular about the financing of the current account deficit.

The strong reaction to capital inflow data relating back to September illustrated this concern, he added, forecasting that a euro breakthrough of $1.20 could well be in prospect, particularly in thin pre-Christmas trading volumes.