The dollar traded in range yesterday morning in Asia after a short covering squeeze witnessed in the wake of a larger than expected fall in the US weekly initial unemployment claims on Friday. With New York and Tokyo markets closed for a holiday on Monday, price movements were seen exaggerated as liquidity dried up. The lack of trading factors also had investors focused on the waltz of officials? statements impacting on currency movements, with the latest remarks from European Central Bank President Wim Duisenberg throwing some water in the euro?s recent fiery rally. Duisenberg clarified in a statement that a recent G7 call for exchange rate flexibility last month was not directed at the euro. The statement suggested that the dollar recent decline might have been overdone, which fed some pressure on the single currency. Nevertheless, on this last point, markets seem to think otherwise, and the dollar continues its bearish trend. Earlier, Duisenberg was himself quoted saying that the dollar decline would be unavoidable, whilst the US President made remarks about currency policies that offered ?a level playing field? for US companies. With a ballooning US deficit in the background, analysts have long thought that one of the few ways to reduce the deficit would be a sharp depreciation in the US currency. Last Wednesday, the White House did reiterate its support for the strong dollar policy, but this was not volunteered, but was in response to a question posed by a reporter. Markets will decipher this week?s sling of data for concrete clues on the economic recovery path of the US. Against the Mauritian rupee, the common currency was trading at MUR 33.61 as compared to MUR 33.93 a week earlier.

The yen rose below the 108 yen level last week as it took its cue off the dollar?s broad-based slide. Ongoing threats of yen-selling intervention by authorities remain omnipresent, but the tone of these appear slightly tweaked now. On Sunday, Japan?s Economics Minister Heizo Takenaka reiterated his view that the main objective of Tokyo?s intervention was to slow the speed of the yen?s advance. The view was interpreted by traders that Tokyo may accept some leeway for the yen to increase in coming months before stepping in to stem its advance. On Monday, the yen got yet a further boost after the authorities resorted to a surprise monetary easing exercise. The Bank of Japan unexpectedly boosted the amount of liquidity in the financial system by raising the upper end of its target for banks? current accounts held at the central bank. The move was seen by many as an attempt to counter yen strength and to spur the world?s second largest economy. However, economists remain sceptical of the impact of such a policy given interest rates are at near zero percent in the economy, but Japan is still suffering form its longest ever deflation in history. Yesterday, the Japanese currency was offered at MUR 26.56 as compared to MUR 26.16 on last Tuesday.

Sterling retreated on Monday afternoon in London with an empty data calendar leaving sterling at the mercy of movements in the majors. Investors were also left pondering over the interest rate outlook after the Bank of England left rates unchanged at a 48-year low of 3.5 pct. Though the rate status quo was widely expected, some segments in the market were expecting the outside chance of a rate hike, and were slightly disappointed with the rate decision outcome. A weak manufacturing output reading this week and a rise in the August global trade deficit to 3.6 billion pounds have scaled back expectations of an immediate rate increase. Britain is widely speculated to be amongst the first of G7 countries to raise rates sooner than later. Yesterday, the pound was trading at MUR 48.00 as against MUR 48.57 on last Tuesday.

Major data/events this week:

Wed 15 October GB unemployment rate; US retail sales, US Fed Beige book, US NY Fed manufacturing survey Thu 16 October US jobless claims, US industrial production Mon 20 October Ger PPI, E12 trade balance, GB RICS house price survey Tue 21 October GB CBI total orders

Contribution by HSBC