- The Washington Times - Wednesday, February 5, 2003

LONDON, Feb. 5 (UPI) — U.S. Secretary of State Colin Powell's meeting with the United Nations Security Council in New York on Wednesday morning is a key juncture for U.S. plans to topple Iraqi Dictator Saddam Hussein. It is also a key juncture for financial markets. The dollar and U.S. markets look vulnerable to steep falls but also have the potential to rally if Powell shows that the United States is less bent on imminent war than generally believed.

In London trading it is the dollar and the gold price that show most clearly the markets' mood. The U.S. dollar is flirting with a four-year low against the euro while the price of gold, considered a safe haven, has risen to a six-year high.

The euro has risen against the dollar in London trading Wednesday morning and is currently worth a little more than $1.09. A year ago the euro was trading at about 88 U.S. cents. It has now appreciated by more than a fifth against the dollar in the last year.

The rise in the euro is all the more striking in that the economic news from the euro-zone's larget economy, Germany, is bad today. The German unemployment rate rose in January to 11 percent, with 4.62 million workers without jobs. This is a four-and-a-half year high and the worst rate since Gerhard Schroeder became Chancellor in 1998.

Rising unemployment in Germany and the growing risk that the economy will slide back into the recession from which it briefly escaped in 2002 ought to be bad for the euro. But the forces driving down the dollar are stronger. Given its huge deficits in the trade and current accounts, the United States needs very high inflows of foreign capital. With war apparently imminent, those capital flows are not coming and the appreciation of the dollar between 1999 and 2001 is now reversing.

U.S. equities also look vulnerable but with the Dow Jones Industrial Average having closed Tuesday at 8,013, 9.9 percent down on its end-November level, a little more than two months ago, many investors still feel there could be upside if war with Iraq is averted or delayed. Powell could trigger just such a rally today if he gives any sign that the United States is willing to be patient and hold off from attacking Iraq while U.N. weapons inspectors and the Security Council deliberate. Any rebound in U.S. stocks would no doubt be accompanied by some recovery of the U.S. dollar.

If, on the other hand, Powell's statement suggests that the United States is certain to attack soon, and without the U.N.'s backing, if necessary, a pronounced fall in U.S. stocks and further falls in the dollar would be likely.

And so it all depends on Powell. But, in the event of a surprisingly soft statement by him and a rally, it would be wrong, in our view, to be too confident about U.S. equities or the dollar. They also face another enemy as intransigent and perhaps less easily eliminated than Saddam Hussein: the persistent and, in some regards, worsening imbalances in the U.S. economy in the wake of the late 1990s stock bubble. Even without war, the medium-term trend for U.S. assets still seems likely to be down.

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