THE EURO crossed the psychological level of 1.20 versus the dollar last week, as geopolitical worries, structural US economic imbalances and fears of protectionism continued to outweigh strong US economic data. Whilst in the most upbeat, a raft of US economic indicators issued last week was of no help to the greenback. US Q3 GDP shot up at an 8.2 percent annual rate, more than double Q2?s 3.3 percent and the strongest quarterly advance in 19-1/2 years. Chicago PMI, a regional gauge of manufacturing activity level, soared beyond expectations.

Durable good orders and personal income also rose, whilst the latest weekly jobless claims fell. Nevertheless, the greenback failed to capitalize on these. Several factors seemed to be at work. First, this appears consistent with the recent pattern, dating back to at least the unexpectedly strong jobs data at the beginning of the month, under which the dollar did not benefit from robust data.

Second, while strong, the data is not sufficient to alter participants? views of the likely trajectory of the Federal Reserve policy. Nearly no one expects the Fed to hike rates in Q1. Third, the thinness of the market - the US was closed on Thursday for the Thanksgiving Day, whilst Singapore and Japan were also closed during the week ? coupled with month-end flows, may have exaggerated the dollar?s decline.

News that 5 people were treated for exposure to a yet unknown substance in a NY city subway also rekindled fears of terrorist activities, inciting traders to unwind long dollar positions ahead of the week-end.

Buoyant house prices

Elsewhere, in what seems to be a spurt of protectionist action, the US announced it was levying anti-dumping duties on colour television imports from China. The duties (28-46%) will be implemented on 1 December and retroactive to 1 September. China immediately objected whilst the dollar retreated slightly on the news announcement. Against the Mauritian rupee, the common currency was trading at MUR 33.63 as compared to MUR 33.55 a week earlier.

The yen trimmed some losses on Monday morning in Tokyo after the Nikkei stock market average rebounded from an initial two-percent drop after the session start. The yen and Nikkei average came under pressure following news of the nationalization of a troubled regional bank and the death of two Japanese diplomats in Iraq.

Following inspections by government regulators, Ashikaga Bank, a regional bank with concentrated activities mainly in the Tochigi Prefecture north of Tokyo, was found to be insolvent. Premier Junichiro Koizumi called a financial crisis meeting on Saturday to nationalize the ailing bank, making existing shares worthless. The decision came up as a surprise to the market which was expecting a more shareholder-friendly rescue package, as was the case with the Resona Bank in May.

On the economic front, fundamentals continue to point out to a sluggish recovery of the Japanese economy, with industrial production rising a meagre 0.8 percent in October, and retail sales advancing 0.2 percent for the first time in 31 months. Yesterday, the Japanese currency was offered at MUR 25.75 as compared to MUR 26.04 on last Tuesday.

Sterling powered to five-year peaks against the dollar last week, underpinned by brightened interest rate outlook prospects and broad-based selling of the greenback. News of buoyant house prices and an upward revision to UK Q3 GDP fuelled expectations of further interest rate hikes in the pipeline.

The Bank of England holds a two-day meeting this week, with a decision on interest rates due on Thursday. Whilst few are expecting a rate increase this Thursday, money market yields are pricing in a risk of a rate hike in December. Yesterday, the pound was trading at MUR 48.32 as against MUR 48.32 on last Tuesday.

Major data/events this week:

• Wed 3 December

Eurozone Reuters PMI, Eurozone GDP Q3, GB Reuters PMI, Reuters CBI sales, JP Business confidence, US ISM non-manufacturing

• Thu 4 December

Eurozone retail sales, ECB rate, Ger unemployment, Ger industrial orders, GB BoE rate, US jobless claims

• Fri 5 December

US unemployment, US durable goods

• Mon 8 December

GB industrial production

• Tue 9 December

Ger ZEW index

Contribution by HSBC