The dollar tumbled to six-month lows against the euro as concerns about the US economy grew in the wake of Tuesday's terrorist attacks on Washington and New York.
Fears of US retaliation and nervousness ahead of the resumption of trading on Wall Street on Monday also prompted jittery investors to flee the dollar for safer havens such as gold, oil, the Swiss franc and bonds.
No-one knows for sure how the US stock market will respond when it reopens next week after its longest closure since the First World War. But heavy selling of US shares could add to the capital flight from the dollar seen in the aftermath of the devastating plane attacks.
The uncertainty saw the euro trade as high as 92.50 cents yesterday while gold prices closed sharply higher, at $285.30/287.30 an ounce. Oil prices also remained strong, shooting up by $1.45 to $29.82 per barrel before closing almost a dollar firmer on the day as tension mounted over the prospect of US military action.
US bond prices, which resumed trading on Thursday, also benefitted as prices rose and yields fell to historic lows.
"Clearly, foreign investors are freaking out and that shows up in the dollar breaking down and is also showing up in people selling stocks and bidding up gold," said Peter McTeague, Treasury market strategist at Greenwich Capital Markets.
Meanwhile, the outlook for the US economy, and its likely impact on global conditions, remains uncertain. In recent days, there have been positive soundings from a range of leading financial figures including US Treasury Secretary Paul O'Neill, ECB President Wim Duisenberg and Bank of England Governor Eddie George.
Two of the world's leading credit agencies, Moodys and Standard & Poor's have also expressed confidence in the resilience of the global economy.
But emerging statistics paint a less upbeat picture. The University of Michigan's September consumer sentiment index, compiled before the disaster and released on Thursday, fell to an eight-year low. August industrial production data, issued yesterday, also disappointed, dropping for the 11th straight month.
Analysts fear the attacks will prove the last straw for an already faltering US economy.
Meanwhile, European Affairs Commissioner Pedro Solbes admitted Europe would not emerge unscathed from the disaster.
Solbes told a business conference in Budapest that the attacks had reduced the chances of a recovery in the US economy in the current third quarter which meant European growth was not now likely to reach the two per cent level recently forecast for 2001.
"I am not speaking about recession. I am speaking about a clearly positive rate of growth which will probably not reach the two per cent that we had expected," he said.
Markets continue to expect concerted action, led by the US Federal Reserve, to cut interest rates and spur consumer confidence worldwide, despite the ECB's decision to leave its key rates unchanged on Thursday.
However, the fate of a planned G7 meeting in Washington on September 28th, and the annual meetings of the International Monetary Fund and World Bank the following day, are in doubt.
