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Dollar Edges Lower as Geopolitical Tensions Mount

Reuters
Wednesday, 9 Jul 2008 | 5:53 PM ET

The dollar fell Wednesday as news that Iran test-fired nine missileshalted oil's steep drop and unsettled Wall Street stocks, with investors concerned about the impact of soaring energy prices on the fragile economy.

An apparent attack on the United States consulate in Istanbul, Turkey also added to negative global sentiment toward the greenback and caused investors to seek out safe-haven currencies such as the Japanese yen and Swiss franc, analysts said.

"It's Iran and Turkey we should be blaming today (for the dollar's fall),'' said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"What we have seen happen today is the reversal of oil prices and a little bit of uncertainty re-emerging in equity markets, causing investors who were starting to get a little excited about the dollar again to jump back on the euro,'' he added.

Pressure on the U.S. currency was also exerted by lingering fears of more credit-related write-downs at some financial institutions.

Oil recovered some of Tuesday's sharp drop with U.S. crude gaining nearly $2 to rise above $138 a barrel, before settling near flat at $136.05 a barrel. Higher oil prices tend to hurt the dollar because the United States is a heavy energy importer.

Iran said it had test-fired missiles that could reach Israel and U.S. bases in the region, and warned it was ready to retaliate for any attack over its disputed nuclear projects.

The New York Board of Trade's dollar index, which tracks the dollar's performance against six currencies, fell to a session low of 72.574, down 0.5 percent while the euro rose to $1.5734.

The dollar dropped to 106.79 yen and fell to 1.0290 Swiss francs .

Weak Euro Zone Data Ignored

The market was unperturbed by downward revisions to first-quarter gross domestic product growth in the euro zone and data showing a fall in French and German exports in May.

At the same time, European Central Bank Governing Council member Miguel Angel Fernandez Ordonez said the ECB should appear willing to raise interest rates further to keep prices under control, even if there is a risk that the economy might be sinking.

"There is a clear focus on interest rate differentials. The ECB is unlikely to cut rates at anytime and the Fed, although it has warned about inflation, we believe it's unlikely to hike rates anytime soon,'' said Tempus's Salvaggio. ``There are still worries among traders about the longer term systemic risk in the U.S. financial system.''

Credit-related worries and an early spike in oil prices depressed U.S. stocks, adding to the dollar's poor performance against the yen and Swiss franc.

While Federal Reserve Chairman Ben Bernanke's announcement on Tuesday he was willing to keep the discount window borrowing open for investment banks into 2009 was positive, worries about the balance sheets of many financial institutions remained.

Investors will be hoping that Bernanke will maintain his calming tone when he testifies on regulatory restructuring before the House Financial Services Committee on Thursday.

"Bernanke is going to offer more support for the dollar, we might might see a dip in the oil prices as well,'' said Dan Cook, senior market analyst at IG Markets in Chicago.

"For the most part with euro/dollar, baring anything like a military strike, we're going to see it continue to trade in a 1.53-1.59 range. It seems like the market is trying to sort itself out, there is no great news coming out from anywhere.''

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