The dollar bounces back

The dollar bounces back

The US dollar has bounced back sharply from the battering it has received in the past few weeks.

Rumours that a possible coup could depose Iraqi leader Saddam Hussein cheered traders. Even after they proved groundless, hopes that the seemingly inevitable invasion of Iraq could be short and decisive kept the mood bullish.

Investors, some of whom feel that sharp falls in the dollar since the beginning of the year have been overdone, shrugged off poor economic data indicating retail sales - the factor keeping the US economy motoring - fell sharply in February.

Early trading in New York strengthened the dollar by 1.34% against the euro to a level of $1.0842, as dealers took profits on their recent rush to the euro.

In Tokyo, the dollar had strengthened to more than 118 yen.

Real or imagined?

Part of the reason for the dollar bounce was so-called short-covering - traders buying back dollars that they had sold during the currency's recent slide.

This tends to have only a temporary effect on prices, and need not indicate any sort of trend.

But some analysts are arguing that the $1.10 euro/dollar rate represented an unfair undervaluation of the US currency, especially since the German economy is performing so poorly.

The yen, too, has been put under pressure by the increasing belligerence in Korea, where the communist North is making ever more threatening noises against the South.

Europe's advantage

There is little consensus on the dollar, however.

Ivan Ritossa of Barclays Capital argued that the dollar could not become truly strong until the US sorts out its heavy deficits and raises interest rates, which are at historic lows.

This factor has little to do with relative strengths of economies, Mr Ritossa argues, and is more concerned with the attractiveness of financial assets on either side of the Atlantic.

Although Europe's economies are slowing, Mr Ritossa contends that its markets have developed into far more feasible places to deposit investments, and therefore attract a greater share of global capital than they used to.