Last week trading on currency market saw the dollar posting modest gains against the European currency, the first in eight weeks. Several factors were behind the better performance of the dollar. Positioning in the market indicated that short-term market players have accumulated a substantial short dollar position. Given the massive dollar sell off in recent weeks, profit-taking pressures understandably emerged.

Moreover, dollar was supported by fairly strong economic data ? sharp upward revision in August and July retail sales figures, strong reading in Empire State manufacturing Survey index of business condition, as well as in the Philadelphia Federal Reserve?s business activity survey. Such upbeat data boosted the greenback and kept euro bulls in check. Furthermore, for the first time in the US easing cycle, Federal Reserve official appeared to have begun preparing the market for a rate hike.

This spurred a dramatic backing up in the short term interest rates. The yield on the US 2 year-note rose more than 25bp over the past week. In addition, indications by most of the notable Asian players like China, Hong Kong, Singapore, South Korea, Taiwan and Thailand that they had no intention to change their currency regimes in the near future provided more luster to the dollar. The dollar had fallen sharply after G7 countries called for more flexible currency regimes on September 20th. Market players interpreted this call as a criticism of Asian nations? polices of capping local currency gains against the dollar.

Against the Mauritian rupee, the common currency was trading at MUR 33.66 as compared with MUR 33.61 a week earlier.

Confirming its newly found strength, the dollar firmed against the Japanese yen after a newspaper report quoted US Treasury Secretary John Snow as saying Washington did not intend to talk down the dollar against the other currencies. Speculation has been rife that September 20th statement at the G7 meeting was an implicit criticism of Japan?s heavy yen-selling intervention and a reflection of Washington?s desire to see the dollar weaken. Furthermore, upward pressure on the yen appeared to be easing after a two-day meeting between President George W Bush and Prime Minister Junichiro Koizumi ended without any major surprises.

Yesterday, the Japanese currency was offered at MUR 26.41 as compared to MUR 26.56 last Tuesday.

Sterling hit a four-month high against the dollar and gained ground on the Euro on the back of a favourable outlook for UK interest rate. Interest rate expectations heated up last week after Bank of England Governor Mervyn King said that rates could not stay low forever. The Bank of England cut rates in July, taking them to 48-year lows. Sterling also benefited from recent upbeat UK data. Last Wednesday?s healthy jobs data in Britain highlighted the resilience of the UK labour market.

Yesterday, the pound was trading at MUR 48.35 as against MUR 48.00 last Tuesday.

Major data/events this week:

-Thursday 23 September US Jobless Claims

-Friday 24 September UK GBP Q3, UK Retail Sales

-Monday 27 September US New Homes, Japanese Retail Sales

-Tuesday 28 September German Ifo Index

Contribution by HSBC