The dollar closed broadly lower after sinking in the last hour of trading Friday, surprising analysts who assumed traders did not want to be caught short over the weekend with the Middle East war under way.
Gold steadied, rising marginally after Thursday's nearly $30-an-ounce plunge on the New York Commodity Exchange.The U.S. currency climbed fitfully during the day after overnight news that Iraq had fired seven Scud missiles at Israel. But subsequent word that damage was minor undermined the dollar's appeal as a safe-haven investment during times of international strife.
"The optimistic sentiment seems to prevail that the war is going to be over soon," said Earl I. Johnson, a vice president at Harris Trust & Co. in Chicago. "The market seems to look beyond the war to the economic prospects ahead."
Analysts generally agreed that in the event of a peaceful resolution to the Persian Gulf crisis the U.S. economy would return as the dominant factor in foreign-exchange trading and send the dollar lower.
Despite what the market saw as marginally optimistic war news Friday, "I'm a little surprised the market wanted to go home short dollars," Johnson said.
Market participants were left wondering whether Israel would retaliate against Iraq's missile attack, although the United States has repeatedly asked Israeli officials to keep out of the Persian Gulf fighting.
Retaliation could dramatically buoy the dollar's appeal as a safe haven, the analysts said.
"Bush has made it perfectly clear the whole thing could unravel, particularly with Syria and Jordan," said David Marshall, currency analyst for MMS International. "If they change sides, the whole military planning could completely come apart."
The dollar fell narrowly against the Japanese yen in New York, to 132.25 yen from Thursday's 132.30.