The dollar withdrew against a basket of major European currencies last week after a global stock market sell-off prompted a flight away into the so-called higher-yielding currencies, namely the sterling, aussie, candie and euro. The Canadian dollar tested 10-year highs whilst the Australian dollar hit 6-year highs against the dollar on Wednesday. Although the rate pick-up for the euro is not substantial, it benefited from its huge liquidity which other high yielders such as the Canadian and Australian dollar did not have. Last week saw some 30% of S&P 500 reporting earnings. Grim profit warnings form blue-chips such as Microsoft, Amazon.com, etc., sent the leading US stock indices down by 1.5 to 2.0%. Foreign stock investment into the US has long been seen critical towards funding the gaping US deficit. Indeed, as the Washington Post article over last weekend suggested, with the economic recovery apparently taking hold, there is less need to get that extra stimulus through the weaker dollar. Indeed, US Treasury Secretary Snow clarified last week that the US did not intend to talk the dollar down and also that market interest rates may increase as the US economy recovered. Snow?s strong dollar comments is viewed more as a damage control seen by other officials as well since the aftermath of the G7 meeting. In fact at the recent APEC meeting forum, the dollar got a slight boost after forum participants refrained from making any reference to currency policies. Operators had been waiting to see whether US President George Bush, keen on mustering manufacturers? support ahead of an election next year, would incite APEC leaders to make a statement criticising China and Japan for holding their currencies down. Against the Mauritian rupee, the common currency was trading at MUR 33.79 as compared to MUR 33.66 a week earlier.

The yen traded near three-year highs against the dollar last week. It rebounded on Monday on a correction in the Japanese stock markets after the Nikkei average plummeted by more than 6 percent last week. Persistently weak economic fundamentals nevertheless continue to weigh on the yen. The all-industries activity index, which is likened to the gross domestic product (GDP) figure, rose by only 0.3 percent in August from the previous month, suggesting a weak Q3 GDP figures. Investors were however reluctant of selling down the yen ahead of this week?s US Treasury?s semi-annual report on alleged currency manipulation by US trading partners. John Snow testifies on currency report on 30 October though analysts do not expect any major market-moving factors resulting from the report. Yesterday, the Japanese currency was offered at MUR 26.68 as compared to MUR 26.41 on last Tuesday.

Sterling hit five-year highs against the dollar last week, benefiting from interest rate differential flows spurred by a bright interest rate outlook. A buoyant housing market and consistent sales and growth data has cemented the view of a near term rate hike. Hawkish minutes of the October?s MPC rate-setting meeting also bolstered the view that UK will be amongst the first G7 countries to increase rates. The minutes showed the committee came within one vote of delivering a yield-boosting hike this month. The Bank of England repurchase rate currently stands at 3.5 percent, compared to the benchmark US federal funds rate of one percent, and the European Central Bank refinancing rate of 2.0 percent. Yesterday, the pound was trading at MUR 48.81 as against MUR 48.35 on last Tuesday.

Contribution by HSBC