The recovery of the US dollar still lingers amidst the escalating threat of another terrorist attack and the possible US war with Iraq. The United States, which was anticipated to lead the economic growth, is facing a tough time. the situation on the other side of the Atlantic is not much different. Euro, the single currency for the entire euro zone, provides a gloomy picture about its recovery due to the sluggish growth and the inability to impose fiscal discipline the country has been witnessing. Germany has been showing signs of persistent weakness with problems in labor market and rising levels of unemployment.

The dollar's sharp fall over the course of 2002 has put the US currency on the defensive for the first time in nearly a decade. Much has changed in the recent past—US stock markets have lost half their value, twin deficits have resurfaced and the threat of war and terrorism looms over the US psyche. These concerns coupled with last year's retreat from the strong dollar policy hobbled the mighty greenback, sending the currency down nearly 20% against the euro. While the likelihood of a resurgent rise in EUR/USD in 2003 is far from certain, near-term risks remain biased against the dollar, as the currency is beholden to expectations of an economic recovery, current account concerns, and geopolitical considerations. Nonetheless, a likely upturn in the second half of the year should lend renewed support to the greenback as risk aversion recedes and investors look to profit from a cyclical rebound in the US. Yet, over the long-term, a gradual dollar decline may be inevitable due to the trade imbalance resulting from a robust greenback and the currency market's tendency to work in virtuous and vicious circles.

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