Events in US unsettle the euro

The dollar had a roller-coaster ride on the foreign exchange markets yesterday, as the currency responded to each twist and turn of the US presidential election.

Traders and analysts had long assumed that a Bush victory would boost the dollar and damage the embattled European currency. This was borne out by yesterday's action where the euro's fortunes tracked those of the Democratic candidate.

Initial polls suggesting that Al Gore had clinched the pivotal state of Florida sent the euro climbing by almost one US cent in Asian trading. But as confusion set in the euro began diving from its highs of about $0.87.

The slide gathered pace as Mr Gore conceded defeat, taking the European currency to a low for the session of about $0.855. The euro closed at 0.8568 in European trading, down very slightly from the previous close.

As the recount got under way in Florida the euro moved in a narrow range as traders awaited the outcome. "There was just one show in town today," said Paul Bednarczyk, of economic consultancy 4Cast in London. Euro enthusiasts had several reasons to fear a Republican victory, he said. Most assumed that a Bush administration would be less prepared to help the European Central Bank by intervening to support the euro.

Analysts also believe that tax cuts planned by the Bush camp would provide a fillip to the economy, deferring hopes of interest rate reductions over the next six months. "This combination of tight monetary and lose fiscal policy has traditionally been the best recipe for a strong dollar," said Michael Lewis, of Deutsche Bank in London.

Under policies that would eat into the budget surplus more quickly than Mr Gore's plans, a Bush administration would drive up interest rates further increasing the attractions of the dollar.

As the recount dragged on, analysts started assessing the prospect of more uncertainty for the US currency.

Kit Juckes, of Royal Bank of Scotland Financial Markets, said the most likely outcome would be that `the market goes into hibernation until the result is known`.