The Hindu Business Line : Dollar's descent worries financial, commodity markets

THERE is eerie nervousness in financial and commodity markets with no end in sight for dollar's descent, as the euro and pound sterling take the strain and both have soared to a new high against the dollar.

The pound has risen by $1.80 against the dollar and the euro hit a new all-time high, rising within a margin of $1.27.

The euro has appreciated by more than forty cent against the dollar, since euros' record low against the dollar at 0.89 cents about two years ago. The pound sterling has appreciated by twelve per cent in the past four months. Hence, there is much speculation in the markets and the popular perception is that the euro may even rise above $1.30 and pound sterling above $1.80, before the dollar begins to strengthen in the second half of this year.

The dollar may appreciate by ten per cent later this year. There is also much speculation that the Chinese currency could be revalued by a fraction and this could have a positive effect on the value of the dollar, as China has the world's largest trade deficit with the US. On Monday, the US officials estimated their trade deficit with China hit a record $130 billion in 2003. The Chinese currency - rinminbi is also tied to the dollar. It is in this background, the price of gold has soared at a record high level of $425 to an ounce on Monday and on Tuesday gold is seen as the biggest beneficiary of the current dollar rout.

Other precious metals have also surged including silver, which appreciated by over 5 per cent to sell at $6.235 an ounce. According to commodity and currency analysts, gold could surge to $450 mark, which would be its highest mark in last sixteen years.

Last year, gold rose by twenty per cent in background of geopolitical tensions, leading to the US and British initiated war in Iraq. Now the sliding dollar has sent the gold prices to a new high. Recent comments by the US Federal Reserve officials indicating that the US Central Bank or US Federal Reserve will continue to abide by rock bottom interest rates has triggered this week's dollar rout in the markets.

The US Federal Reserve cut borrowing costs to a 45-year low of just 1 per cent last June, and currently the US authorities are in particular hurry to raise the interest rates.

Britain and Australia have so far, modestly increased the interest rates. The European Central Bank is in a deep quandary about boosting the interest rates to stabilise the value of euro against the dollar. The euro has appreciated by over forty per cent against the dollar since it hit a record low two years ago. But the damage soaring euro is inflicting on euro zone exports is already causing concern in the financial capitals of the European Union - particularly in the euro zone area, where twelve countries have adopted euro as their common currency.

German officials are hoping that Finance Ministers of Group Seven countries meeting in Florida, USA next month, may seek a consensus to stabilise the volatile and highly unpredictable currency and commodity markets.

A very strong euro against an increasingly weak dollar obviously earns less revenue for major European companies trading in the US market. If the situation is not stabilised in the coming weeks, the spillover effect on major European company's revenue and profit figures could be dramatic.

The silver lining on otherwise bleak currency and commodity horizon is that the US economy is displaying newly found fresh resilience and the demand for European manufactured goods in the US is strong, according to major German exporters.

It is also ironical to note that the US stock market on the Wall Street has hit a new 22-month peak, as dollar sinks to fresh lows.