Dollar's solid image threatened

The US attacks saw the dollar tumble against the yen

Sharp falls in the value of the dollar since the US attacks have sparked talk of a fundamental realignment of global currency markets.

Traditionally, the US currency has been seen as a safe haven for investors in times of crisis.

But the dollar dropped by as much as 3% on the foreign exchange markets in the hours after the attacks, falling particularly sharply against the Swiss franc, the yen and the euro.

While it regained some of those losses on Wednesday, early indications suggest that it may remain relatively weak for some time to come.

In its place, the euro - long regarded with some mistrust on international markets - could start to play the role of global financial anchor.

Weakness predicted

The outlook for the dollar is not positive.

Even in the weeks before the attacks, the currency had been starting to lose some of its long-established strength, suffering falls against the euro and the yen as fears grew of a US economic slowdown.

Now, some say the attacks could push the US economy from slowdown into slump.

And if the centre of financial-market trading shifts, even temporarily, from New York to centres outside the US, that too will put pressure on the dollar.

Another factor hanging over the foreign exchange markets is the increased likelihood of US interest rate cuts, which will make the dollar a less attractive investment.

Intervention ahead?

Already, a few international financial policy-makers seem prepared to intervene on the dollar's behalf.

Central bankers have hinted at intervention

The president of the European Central Bank, Wim Duisenberg, said on Wednesday that he did not rule out market intervention.

And the Bank of England confirmed that the US Federal Reserve had asked it and other central banks to minimise transactions in the dollar.

Finance ministers around the world are in close contact, and could be prepared for a concerted intervention if the situation becomes critical.

This would be far from unheard-of. Central banks around the world intervened together on the currency markets a year ago - although that was to support the euro against the dollar, rather than the other way around.

Benign weakness

The relatively modest dollar falls seen so far are unlikely to be enough to provoke intervention, however.

At its current level - just under $0.91 against the euro - the dollar is stronger than it was in mid-August, when it hit a series of lows.

For US firms, a slight softening of the dollar will prove a positive boost to export performance.

Last year, the prolonged strength of the dollar, especially against the European single currency, was considered one of the most urgent financial problems in decades.

Reputation threatened

But while the economic consequences may be mild, or even benign, the symbolic effect could be more damaging.

The dollar has long been a safe haven in developing countries

On Tuesday and Wednesday, the US authorities saw investors in emerging markets such as Russia and Pakistan rushing to swap their dollars for once-despised local currency.

The dollar has long been a proxy currency in many developing economies, thanks to its reputation for unshakable solidity.

More seriously, the dollar has been remarkably volatile this year.

Within the last few months the value of one dollar has varied from less than 114 yen to more than 125 yen.

A swing of 10% between two rich-country currencies in half a year is rare, and a blow to the dollar's secure image.