The euro plumbed four-month lows against the dollar on Tuesday, weighed down by bearishness in the eurozone economy which is fuelling global outflows from eurozone debt into riskier US and Japanese equities. Recent downbeat data from the eurozone largest economies, including Germany, France and Italy suggested the 12-nation bloc was mired into recession.

Germany, eurozone?s largest economy, was confirmed by its statistics office to have contracted for two consecutive quarters, the technical definition of a recession. France, the bloc?s second largest economy, reported last week that its economy had shrunk by 0.3 pct. Similar contraction data for Q2 was reported by Italy and the Netherlands. Given the lacklustre outlook for Europe, investors have been constantly dumping the euro, breaking through successive support levels to trade towards 1.0850 at the start of the week.

The single currency has shed about 8 pct since reaching a record $ 1.1933 on May 27. In sharp contrast, the US economy seemed to be benefitting from a relatively faster growth differential-probably the results of the aggressive campaign of interest rate cuts implemented by the Federal Reserve since 2001 and before.

The Dow Jones Industrial Average has gained for six weeks out of seven and has added 24 pct from its low of 2003 set on March 11. The advances were buoyed partly by government reports showing housing starts surged to a 17-year high, first-time claims for unemployment insurance declined to the lowest in six months and manufacturing in the Philadelphia area expanded at the fastest pace in five years.

The debate at the moment is whether the US growth outlook is already factored in currency movements. If such is the case then the dollar upside might be limited. Against the Mauritian rupee, the common currency was trading at MUR 31.87 as compared with MUR 33.66 a week earlier.

The yen cruised ahead last week, buoyed by prospects of a recovering economy, albeit at a slow space. Data released earlier on Friday showed Japanese economic activity rose firmly in June from the previous month, with the all industries activity index up by a higher than expected 0.9 pct. July trade data also underscored the recovery argument, after the country registered a trade surplus. Reflecting the renewed confidence in the Zen economy, data showed foreign investors continued to pour funds into Japanese shares. Last week foreign investors boosted their purchases of Japanese equities five-fold to 450 billion yen from 91 billion yen the previous week. With Japanese investors selling foreign bonds en masse at the same time, the yen was subject to upward pressure.

Still, traders were wary of chasing the yen too high due to repeated intervention threats by officials from the Bank of Japan/Ministry of Finance. Japan has sold a record nine trillion yen ($76.23 billion) already this year to block the yen?s rise, which it fears could derail an export-led recovery of the economy. Yesterday, the Japanese currency was offered at MUR 25.08 as compared to MUR 24.62 on last Tuesday.

Sterling retreated against the broadly-stronger dollar last week though against the single currency, cable made some headway following data that reflected a resilient economy. With UK closed on a holiday on Monday, currency movements were range-bound. Last Thursday, the pound ticked up following upbeat retail sales data and a survey showing encouraging signs from the hitherto struggling manufacturing sector. A healthy state of government finances, which swung back to surplus in July, also uplifted sentiment. Yesterday, the pound was trading at MUR 46.20 as against MUR 46.64 on last Tuesday.

Major data/events this week: Thu 28 August - Gfk consumer confidence, US final sales, US jobless claims, US real GDP, JP unemployment, JP industrial output, JP retail sales

Fri 29 August - Ger GFK consumer sentiment, Fr unemployment rate, US NY NAPM, Chicago PMI, U Michigan sentiment

Mon 1 September - Ger retail sales, E12 manufacturing PMI, GB CIPS PMI

Tue 2 September - E12 PPI, E12 unemployment rate, ISM US manufacturing

Contibution by HSBC