View from City Road: Dollar drama unfolding into crisis

The storm clouds over the world's bond and stock markets are becoming thicker and more menacing. Footsie struggled through a nervous session to end about 30 points down, only for the dollar shortly afterwards to fall to a post-war low against the yen. Wall Street, after slumping more than 50, closed 34 in arrears at 3,707, a loss of 103 points in three days.

The world's central banks need to mount a convincing defence of the dollar as a matter of urgency. Otherwise, drama will fast turn into crisis.

The saving grace of the bear market so far is that it has been driven by futures activity, with little sign of big institutional players liquidating their portfolios of shares and government debt and putting the cash on deposit.

The optimists argue that the time cannot be long coming before these players regard the markets as good buys on fundamental valuations, which might then persuade them to step in and stop the rot.

Thus far, however, they have resolutely sat on their hands. Every foray of bargain-hunting has been rewarded by another blow, justified or unjustified. The mood hardly suggests that the institutions are going to be in any hurry to plunge back in.

With the currency markets increasingly focusing on the prospects of movement in the US-Japanese trade dispute, the mood of nervousness might have at least another three weeks to run at best. As we observed yesterday, fear still dominates world markets. It will take a lot to restore confidence.

Things can change rapidly, of course, but last night it was looking as if advisers to Eurotunnel could kiss goodbye to any prospect of saving their pounds 856m rights issue from the underwriters.