Dollar plunges on fears of policy reversal

The Bush administration was forced to reiterate its support for a strong dollar yesterday as the currency hit fresh five-month lows on fears that Paul O'Neill, the Treasury Secretary, was about to reverse his policy.

The dollar fell as far as 91.40 cents to the euro, its lowest since 92.09 on 14 March. It dropped to 119.82 yen, the weakest level since 7 June.

The dollar was undermined by speculation that Mr O'Neill was planning to use an appearance on the financial TV channel CNBC late last night to change the dollar policy.

But Ari Fleischer, the White House spokesman, said the so-called strong dollar policy remained in place. "The position is unchanged," he told reporters.

A Treasury spokesman added: "Mr O'Neill will be talking about the economy and the stimulative effect tax rebates have had. There is no change in dollar policy."

The dollar has fallen in the wake of the Federal Reserve Board's "beige book" of regional data that showed manufacturing gloom spreading into the rest of the economy.

This was reinforced by a warning from the International Monetary Fund on Tuesday that the dollar was "at risk for a sharp depreciation".

Nick Stamenkovic, senior analyst at Nomura International in London, said that a major reassessment of the US economy was underway. "If investors start to lose confidence in US assets then the dollar [will] take a mighty fall but there's no evidence of that," he said.

The dollar received a boost from a report showing that industrial output fell by 0.1 per cent in July, its 10th consecutive drop but much less than had been forecast.