Market turbulence is reaching a peak

Last week, shares slumped around the world, and the once-mighty dollar plumbed a series of record lows.

Oil prices - which have a huge influence on global economic performance - have come close to 10-year highs, and other commodity prices have continued to surge.

Although there seems to be less uncertainty over the likelihood of war with Iraq, the markets have been spooked by disagreement over the likely economic effects of war.

According to some recent forecasts, a conflict of any significant duration could shave 1.7 percentage points off world growth - an amount equivalent to $550bn, without even counting the direct costs of waging war.

Shares suffer

Stock markets are likely to be the focus of attention.

Most major markets fell sharply last week - the Japanese market hit 20-year lows, while European markets touched their lowest point since the mid-1990s.

Wall Street has lurched up and down, but like other markets has lost 10% of its value this year alone.

In the absence of any major market-moving corporate news, most traders are expecting further falls this week, despite repeated assurances from some that the effects of any war have been more than factored in.

Dollar droops

The currency markets have been the other main arena for war worries.

How long will oil prices remain high?

As war has approached, the dollar has tended to suffer in relation to the pound, euro and yen - and especially in relation to supposedly safe havens such as the Australian dollar and Swiss franc.

The US Government, which in recent years has been reluctant to spell out its desired exchange rate for the dollar, has become far more explicit about the need for a strong dollar.

But the US currency had already been weakened by the effect of a series of corporate scandals last year, which caused an exodus of investors out of US assets.

Pros and cons

The fundamental problem facing investors is to decide whether war will be good or bad economic news, and if bad, how bad.

Oil prices have risen sharply, and may continue to do so if conflict in the region disrupts the industry.

But a rapid US occuption of Iraq - a country that could become the world's number-two supplier of oil - should boost supplies of crude significantly in the longer run.

The vast projected government spending needed to prosecute a war may have a damaging effect on state finances.

But any government spending - even on tanks and bombs - generally stimulates economic activity.

And consumer behaviour, the key driver for many Western economies, has proved almost impossible to second-guess.

Consumer confidence barely faltered in the months after September 11, despite dire predictions - but it now seems to be failing in many economies for no obvious reason.

An ill wind

In the short term at least, analysts predict a stampede for safe havens.

This means obvious hideaways such as the gold market, but also the sort of low-yielding markets that are often overlooked in times of prosperity.

The bond markets - and especially US government bonds - have benefited from the current mood.

Salomon Smith Barney's world bond index has risen by 5% this year, during a period when global stock markets have fallen by the same amount.