Dollar Skids as Fears of War Rise

The dollar, not long ago the strongman of world currencies, is wilting as global investors fret about the potential for war with Iraq and about the huge U.S. trade deficit.

The dollar closed at nearly a three-year low against the euro on Tuesday, though it rallied from its worst levels after the White House said it favors a robust currency.

It also fell against the yen, the Swiss franc, the Canadian dollar and other key currencies.

Meanwhile, gold hit a 5 1/2-year high, benefiting in part from the dollar’s woes.

Analysts said the latest downturn in the dollar’s value reflects concern that a conflict with Iraq is inevitable, and that a war would encourage foreign investors to keep their money home.

The U.S. needs to lure about $1.4 billion of foreign capital a day to fund its trade deficit.

The currency tumbled early Tuesday after Secretary of State Colin L. Powell said the U.S. is skeptical Iraq has made a full declaration of its weapons-production programs.

The euro rose as high as $1.033, its strongest since January 2000. But the dollar clawed back from some of its losses after White House spokesman Ari Fleischer said the government supports a “strong” currency.

The euro ended at $1.028 in New York, up from $1.022 Monday.

The dollar eased to 121.24 yen from 121.28 Monday. It fell to 1.428 Swiss francs from 1.443.

Fleischer’s comments were the first by the Bush administration since the president ousted Treasury Secretary Paul H. O’Neill and named John W. Snow to replace him. The statement dimmed speculation that Snow -- a member of the Business Roundtable, an executive group that has urged the government to weaken the dollar -- would try to drive down the dollar to bolster U.S. exports.

A cheaper currency makes U.S. exports less expensive abroad. The flip side is that it makes imports more expensive for American consumers, threatening higher inflation.

Currency traders pay close attention to government pronouncements on the dollar, because if the administration chooses it could intervene to buy dollars in the market to stem any decline.

Over the last two decades, investors who believe the dollar’s value is too high have regularly pointed to the U.S. trade deficit. The deficit in the U.S. current account, the broadest measure of trade in goods and services, was $127 billion in the third quarter, near a record high.

In theory, a large deficit undermines an economy and its currency, over time. But in the late 1990s the dollar benefited as investment poured into the U.S. from overseas.

However, a war “will lead to a sharp reduction in cross-border capital flows,” said Lee Ferridge, head of global currency strategy at Rabobank in London. “It’ll be bad for the dollar because of the current account deficit.”

Concern that the dollar might continue to slide also is driving some global investors to buy gold. Near-term gold futures in New York edged up 40 cents to $337.40 an ounce Tuesday, the highest since June 1997. The price has jumped from $318 at the end of October.

“Gold is the anti-dollar trade,” said Robert Sinche, currency strategist at Citibank in New York.