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Economic uncertainty dominates after attacks on US

Markets are calmer as they await news and economic direction

(Keystone)

The economic implications of Tuesday's terrorist attacks in the United States are starting to filter through. Although uncertainty over the extent of damage and the possible retaliation measures are casting a shroud of uncertainty over world markets.

Analysts said the US's first damage limitation exercise might be to cut interest rates. "The US government has to restore consumer confidence and business confidence and in the very short term they might cut interest rights to do so," said Cantrade Private Bank's chief economist, Marcus Allenspach.

He stressed that a further rate cut would be only a short term solution, saying that the markets, like the public, were expecting Washington to "find out who was behind the attack and give a clear message about how it is going to deal with the economic consequences".

Psychological impact

Allenspach told swissinfo that business confidence was likely to be hit not only by Tuesday's attacks, but by the US's possible military response.

"If you are a business, the first thing you do in a case like this is postpone investment, hiring and capital plans. We are likely to see a slump in capital spending until the political situation is resolved."

Although the dollar recovered some ground in Tokyo on Wednesday - bouncing back by nearly one per cent against the yen - analysts said they expected the US currency to fall further.

"Money is cowardly. When something like this happens, foreign investors will repatriate funds out of the US," said Hajime Kawamura, foreign exchange manager at Sumitomo.

Consumer confidence

As to the effects on the global economy, analysts warned that business and consumer confidence was likely to decline.

"The attacks seem to be a serious blow to the US economy," said Toshiyuki Suzuki, an economist at Sanwa Bank in New York. "With all the major league baseball games cancelled and Disney World shutting down, economic sentiment is likely to worsen quickly."

However, Cantrade analyst, Marcus Allenspach, is less concerned that the attacks will lead to a full blown recession. "There's a big difference between what happened in 1990 in the Gulf War when oil supply was hit and now. This time the Saudis have promised to boost supplies."

"In 1990 it was clear that a large scale military conflict would take place," he added. "This time it's less likely to develop into a full scale military assault."

Liquidity worries

Central banks were mainly concerned with potential liquidity problems, with most saying they were ready to pump funds into the market, if necessary.

The European Central Bank has already released some emergency funds, and the Swiss National Bank said it prepared to inject cash into the banking system.

William McDonough, president of the Federal Reserve Bank of New York, who is currently attending a meeting of the Bank for International Settlements in Basel together with Fed chairman Alan Greenspan, said the US central bank would provide liquidity to financial markets as needed.

swissinfo with agencies

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