Concerns about a war with Iraq dominated markets as investors shrugged off a raft of decent corporate earnings reports and sent US stocks and the dollar tumbling. The euro breached $1.08 as the US dollar hit three-year lows against the European currency.
The Dow Jones Industrial Average and S&P 500 index each lost 2.5 per cent by midday, falling to levels not seen since October, while a 3 per cent fall in the Nasdaq Composite erased this year's gains. The Dow later closed at 8131.01, down 2.85 per cent. The tech-led Nasdaq 996.19, down 3.53 per cent.
Bellicose rhetoric from US officials weighed on the dollar, which has hit three-year lows against the euro. Yesterday it reached $1.083, having started the year at $1.049.
Investors continued to show disdain for global equity markets as the key European indices fell to near six-year lows and London's FTSE 100 set a new record by ending lower for the tenth consecutive session. The worst performing market in Europe, however, was Frankfurt. In late trading, the Xetra Dax index was down 2.9 per cent, while the FTSE Eurotop 100 index was 1.1 per cent lower. In Dublin, the ISEQ index edged lower, with Ryanair and Jurys among the stocks hit by war fears.
Concerns that US-led military action against Iraq could be just around the corner, combined with uncertainty about the prospects for the global economy, has encouraged investors to switch away from equities and instead put their money into traditional safe havens. The price of gold has climbed to six-year highs, while the price of Brent crude oil climbed back over $30 a barrel yesterday, rising 75 cents to $30.50.
The dollar's recent weakness has also been grabbing the attention of equity investors, with the US currency slipping 8 per cent against the euro in the past eight weeks and 5 per cent against the Japanese yen.
Yesterday the US dollar hit a three-year low against the euro for the eighth trading session in a row, with analysts attributing the slide to mounting concerns over the conflict with Iraq.
Financial markets are starting to price in the prospect that the US will take unilateral action and the markets are also worried that there will be a long build-up to war. This, analysts said, would result in prolonged uncertainty in financial markets, a continuation of high oil prices and a risk that many companies would postpone investment.
The dollar is especially vulnerable to uncertainty in financial markets. During periods of high tension, international investors are less willing to increase their exposure to overseas markets, making it harder for the US to fund its bloated current account deficit.
Many economists expect the US deficit to reach as much as $550 billion this year as the US continues to outpace other large economies. There are also signs that the recent slide in the dollar is worrying some central banks.
