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Dollar Retreats on Security Warning

Mon Aug 2, 2004
By Justyna Pawlak

LONDON (Reuters) - The dollar fell about one percent against the Swiss franc on Monday and lost ground versus the euro and yen after warnings of possible al Qaeda attacks prompted investors to move their cash into safe-haven assets.

Over the weekend, intelligence warnings of al Qaeda threats to attack the New York Stock Exchange, World Bank and International Monetary Fund prompted the United States to issue a "high" level of alert for financial institutions in New York and Washington.

The Swiss franc, a traditional refuge in times of geopolitical uncertainty, was the biggest gainer on the day.

Some analysts also said the dollar's security-driven losses were accelerated by continuing gains in oil prices.

"The terror warning is a negative for the dollar given the U.S. is seen as a target and the dollar is seen as the currency most vulnerable to geopolitical risks," said Shahab Jalinoos, chief currency strategist at ABN AMRO in London.

"The U.S. economic recovery is still seen as fragile. It has yet to prove it is self-sustaining so anything that knocks it off balance would be seen as negative for the currency."

The dollar slipped from last week's six-week high against the euro and two-month peak against the yen to stand at 110.77 yen and $1.2076 per euro by 1000 GMT, down about half a percent on the day.

Against the Swiss franc, the dollar fell to 1.2690.

The euro was also buoyed by news manufacturers in the euro zone increased production in July at the fastest pace in nearly four years. The Reuters Eurozone Purchasing Managers' Index rose to 54.7 from 54.4 in June, matching May's 43-month high.

Meanwhile, U.S. light crude oil traded near fresh 21-year highs just below $44 a barrel.

"There are concerns about downside to U.S. consumer demand from high oil prices, which could lead to the market pulling down its U.S. interest rate hike expectations," said Jalinoos.

European and U.S. government bonds also benefited from safe-haven flows with U.S. Treasury yields hitting two-week lows, while stocks were hit.

"The general theme is one of risk aversion," said Adam Cole, senior currency strategist at Royal Bank of Canada Capital Markets.

"The terror alert in Washington and New York means we are seeing flows out of equities into bonds and out of the dollar into the Swiss franc and other currencies with strong external positions."

However, economic data were also on investors' radar screens after disappointing numbers on Friday which showed U.S. gross domestic product growing 3 percent in the second quarter, below consensus forecasts for a 3.6 percent rise.

Nevertheless, analysts noted that a surprisingly strong July reading of Midwest factory activity -- also released on Friday -- boded well for a broader pickup in Monday's national manufacturing survey.

At 1400 GMT, the Institute for Supply Management issues its manufacturing index, which is forecast to read 62.0 for July from June's 61.0.

Looking further ahead, the market's big focus this week will be the U.S. non-farm payrolls report for July, due on Friday and the last major data before the Federal Open Market Committee's policy-setting meeting on August 10.

The market is widely expecting the U.S. central bank to raise interest rates by a quarter-point to 1.50 percent and to indicate that further measured rises are in the pipeline.

Rises in U.S. interest rates are seen as supportive for the dollar as they make returns on U.S. assets more attractive to foreign investors.




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