The dollar fell on Tuesday in New York trading after the Chicago National Association of Purchasing Management (NAPM) manufacturing index undershot market expectations. The NAPM is a closely watched indicator of manufacturing activity level in the Midwest. After last week?s smaller than expected cut in the benchmark interest rates by the Federal Reserve, speculation of a turnaround in the world?s biggest economy fuelled a temporary rise in the dollar which markets nonetheless wanted to confirm. The manufacturing report, being at the lower end of expectations, frustrated dollar bulls who have been rallying the dollar to one-and-a-half highs against the euro in the wake of the Fed?s announcement. The latter cut interest rates by 0.25% to 1% last Wednesday, its lowest level since 1958. It kept its split outlook of balanced growth risks but the risk of an undesired fall in inflation, noting on the downside that the US economy had still not entered a self-sustaining growth path. In fact, the dollar initially booed the rate cut, whilst equities and treasuries literally fell immediately after the rate cut. Nevertheless, it gradually edged up against the euro after the Fed dovish cut stoked speculation that the easing cycle may be through and that growth may pick up. Investors will closely scrutinize economic data in the form of US Institute of Supply Management manufacturing report and jobless claims due this week for further clues on the path of the US economy. Against the Mauritian rupee, the common currency was trading at MUR 34.07 as compared with MUR 33.59 a week earlier. The yen edged up on Tuesday morning in Asia, boosted by a stronger-than-expected ?tankan? corporate survey report - a main gauge of sentiment aimed at large manufacturers. The key diffusion index improved to -5 in the last quarter from a previous -10. It also fuelled the Nikkei index upward, giving an additional boost to the yen. However, traders were wary of pushing the yen too high on fears of intervention by the Japanese authorities. On Monday, the Ministry of Finance announced that Japan sold 628.9 billion yen in the currency markets in the period from May 29 to June 26. However, it did not mention which specific currencies were bought nor on which actual date it actually intervened. Last month, official statistics revealed the authorities stepped into the market to sell some four trillion yen, its largest ever volume of yen-selling intervention. Yesterday, the Japanese currency was offered at MUR 24.78 as compared to MUR 24.74 on last Tuesday. Sterling rose against the limp dollar on Monday afternoon, taking its cue from the negative impact of the US NAPM manufacturing report on the greenback. Focusing rather on the dollar fortunes, investors shrugged off mixed domestic consumer credit and housing data. The Bank of England said consumer credit grew by 1.1 per cent on the month but mortgage lending rose by the lowest pace since September 2003. Fundamentals wise, sterling is yet to see the end of the tunnel. On Friday, data showed the British economy expanded at its weakest pace in 11 years in the first quarter as businesses and consumers cut spending in the run-up to the Iraqi war. UK GDP rose by only 0.1 per cent in the first quarter, and the news sent the sterling briefly to a two-week lows against the dollar. Yesterday, the pound was trading at MUR 49.04 as against MUR 48.51 on last Tuesday.

Major data/events this week: Wed 02 July E12 PPI M/M, US Factory orders Thu 03 July Reuters Services PMI, GB CIPS/Reuters Services, US Unemployment rate Fri 04 July Ger Industrial orders m/m Mon 07 July GB Industrial Production m/m, GB Manufacturing Production m/m Tue 08 July Ger Unemployment, Ger Industrial production M/M

Contribution by HSBC