–The Euro...The New World Currency?
 

Currency war looms as dollar keeps plunging
David Smith, Economics Editor

ANALYSTS are warning of a “currency war” and the threat of intervention by European and Asian central banks as the dollar’s slide continues. Its fall pushed the pound above $1.90 briefly last week, with many traders expecting a rise to $2.

The dollar’s fall, which has accelerated since George Bush’s election victory this month, also saw the euro hit a record high of $1.3329 on Friday. As well as worries about America’s budget and current-account deficits, it has been hit by suggestions that central banks are diversifying their currency reserves out of dollars.
 

“It’s a very dangerous game when central bankers start to talk about large-scale dollar devaluations,” said Mark Cliffe, an economist with ING Financial Markets. “We’re open to the danger of very destabilizing currency markets.”

Last week Charles Bean, the Bank of England’s chief economist, warned of further dollar weakness, but noted that the US currency had dropped by only about half the 30% fall needed in the 1980s to correct US imbalances. Alan Greenspan, the Federal Reserve Board chairman, pointed to the need for a weaker dollar to correct the US current-account deficit.

According to economists at American Express, intervention by the Bank of Japan is likely if the dollar threatens to drop below 100 yen, and by the European Central Bank if the euro rises above $1.35.