With the initiative in the global economy shifting from the United States to the European Union, and with the US Treasury Secretary error-prone in his pronouncements on monetary policy, the dollar looks set for a period of fluctuation on world money markets.
The International Monetary Fund forecast at the weekend that US growth would decline to 1.7 per cent, down from an earlier 3.2 per cent estimate, while growth in the euro zone would be almost double, at 3 per cent.
Mr Paul O'Neill has acknowledged that he made a mistake in telling the German newspaper the Frankfurter Allgemeine last week that the new US administration was not pursuing a strong dollar policy. The US Treasury Secretary's comments caused the dollar to fall sharply against the euro.
But his subsequent backtracking and his colourful promise that he would hire the Yankee Stadium and have bands playing if the US reversed its policy on a strong dollar have not convinced many analysts.
"This guy is an industrialist and he must see that the dollar has appreciated by 70 per cent in 70 months," said Mr Nick Parsons, chief currency strategist at Commerzbank in London.
"O'Neill is coming up with comments that leave the market in limbo," said Mr Mark Thome, vice-president of treasury at Fortis Financial Markets. "People don't know where he stands and will start ignoring what he says."
The outspoken former head of Alcoa Aluminium is still feeling his way in one of the world's most sensitive jobs, certainly in regard to semantics. Before leaving for his G7 debut at the meeting of finance ministers in Sicily at the weekend, he told journalists in Washington "there are some things I truly don't understand that I will try to discover in my engagement," in Sicily.
The "intellectual fabric around the subject of dollar policy" as he later called it is one area where he has been learning fast. He has told interviewers that he believes markets and not governments should set currency values. But Mr O'Neill will have difficulty dispelling suspicions that the Bush administration is prepared to allow dollar depreciation to promote domestic exports.
During the Clinton administration, successive treasury secretaries took pains to emphasise their strong dollar policies to sustain confidence in investment in the US.
The prospect of a further rate cut in the US to reinvigorate a slowing economy could also send the dollar lower against major world currencies. Despite the biggest monthly rise in a decade in US wholesale inflation, which shot up 1.1 per cent in January, Wall Street analysts expect another half a percentage point cut when the Federal Reserve meets again on March 20th, and another quarter per cent soon afterwards.
The euro rose by nearly a full percentage point against the dollar and the yen yesterday, boosted by financial and political turmoil in Turkey and expectations that the euro zone economy would outperform the United States and Japan.
The dollar has been hurt also by a sharp plunge on Wall Street after Nortel Networks, Dell Computer and Hewlett-Packard warned that business will slow further this year.
Stock and bond markets in the US were closed yesterday for President's Day. Last week ended on a pessimistic note as technology stocks tumbled on renewed fears about future profit growth. The tech-focused Nasdaq composite index dropped 127.53 points to close at 2,425.38 on Friday, a 5 per cent fall for the day.
