Euro climbs to three-year high against dollar

The dollar fell victim to unrelenting pessimism yesterday, falling to a new three-year low against the euro and a three- and-a-half month low against the yen after lacklustre US economic data cast doubt on the recovery.

With the market increasingly disquieted by the prospect of war with Iraq and a brewing confrontation with North Korea, US manufacturing and housing data showed the pace of economic recovery remains stubbornly uneven.

Meanwhile, oil prices charged higher again as traders bet on a US attack against Iraq early next year and as supplies from OPEC nation Venezuela stayed choked off by a strike now in its fifth week.

US light crude futures set a new two-year high in early trade of $33.65 (€32.18) a barrel, up 93 cents from Friday.

London Brent crude rose 86 cents to hit $31.02 a barrel, a 15-month high.

Oil prices edged briefly off session highs on word from an OPEC delegate that the oil producer cartel could increase supply in mid-January unless the current market spike subsides by then.

Oil has risen more than $5 in December and prices are now more than $10 higher than at the start of 2002. Motorists are expected to shortly face increases at the pumps as a result, with petrol prices directly linked to the cost of crude oil on world markets. Meanwhile there are concerns that, if sustained, the higher oil prices could damage international growth prospects.

Much will depend on events in Iraq. US Secretary of State, Mr Colin Powell, has said Washington had not yet decided whether to attack Iraq, but was taking "prudent action" in readiness.

Dealers think an attack could start soon after January 27th when the chief UN weapons inspector Mr Hans Blix delivers a report to the Security Council on the progress of his inspections teams.

In the US further weak economic data continued to add to the dollar's woes.

The National Association of Purchasing Management-Chicago said its index of business activity showed expansion for a second successive month in December. But at 51.3, versus 54.3 in November, it indicated a slower-than-expected pace.

"It's evident that the dollar is still an unwanted, overweight (asset) for portfolio managers and generally a hot potato for traders," said Mr Andrew Delano, currency strategist at IDEAGlobal, a research firm in New York.

For the market, "the equation is really frustration with the US economy and concern over what is brewing on the worldwide scale, which is taking the greatest toll on the dollar", he added.

As holiday-thinned trading dampened interest, the dollar fell to its weakest level since November 1999 against the euro, at $1.0465, down 0.20 per cent on the day.

But the euro suffered its largest one-day fall in more than two weeks against the yen, falling more than 1 per cent on the day to stand near 123.70 yen.

In times of global uncertainty, risk-averse investors have been seeking safe havens in the currencies of countries such as Switzerland and Japan, which are less reliant on capital flows because of large export balances.

However, such strengthening ill-befits Japan, which is struggling to avert financial and economic deterioration.

The dollar has suffered for weeks from concern over Iraq. North Korea has added to the pressure following Friday's news that it had expelled United Nations weapons inspectors and made plans to restart its nuclear program. - (Reuters)