The euro maintained its uptrend versus the dollar in the first full week of 2004, hitting new multi-year highs above $1.2868 on Friday in the wake of dire US employment data.

US non-farm payrolls rose 1,000 when economists were expecting a rise of 130,000 and although the unemployment rate did fall to 5.7% from 5.9%, this reflected people leaving the labour force rather than being hired. The euro did correct to around $1.2560 mid-week ahead of the European Central Bank (ECB) meeting, but the single currency quickly reversed losses and rallied after ECB Chief Jean-Claude Trichet admitted that the recent exchange rate developments were having a negative impact on the price competitiveness of the euro area but noted that the ongoing global expansion should partly compensate for this.

In the US, reiteration of the strong dollar policy by US Treasury Secretary failed to provide any boost to the greenback. It must be said that comments from other Federal Reserve officials showed little concern about either a dollar crisis or the dollar?s weakness and implied that rates would remain on hold for some time. The ECB, for its part, did not change interest rates as has been widely expected.

Against the Mauritian rupee, the common currency was trading at MUR 33.70 as compared to MUR 33.79 a week earlier.

After spending the majority of the week in a 50 pip range above 105.90, the yen fell off briefly over two big figures above 107 on what was thought to be very aggressive Ministry of Finance/Bank of Japan intervention. Estimates of the size of the operation are thought to have rivaled the record monthly intervention of September 2003 of JPY4.45 tln (~$40bln). The action left the market a bit irked but not put off from their end-Q1 objective near 100. The rally also gave Japanese exporters a chance to sell dollars at higher levels. USD/JPY closed the week around 106.40 as a result. Japanese intervention was higher in H2 2003 than in all of 2001 and 2002 combined though admittedly the economy has improved since improved and portfolio inflows to the equities market combined with the current account surplus have helped reverse yen sentiment in recent months.

Yesterday, the Japanese currency was offered at MUR 24.84 as compared to MUR 25.17 on last Tuesday.

Sterling stormed to $1.8577 on Monday, its highest level since Britain?s exit from Europe?s Exchange Rate Mechanism in September 1992. Protracted dollar weakness and speculation of rate hikes by the Bank of England accounted for the pound?s drive. Whilst the Bank of England kept rates unchanged at their January meeting as expected, sterling gave up no ground on the news closing at its highs near 1.8500. The market is expecting some 50 to 75 bp of hikes this year and the potential for yield pickup has reportedly increased demand for sterling by a variety of medium term players. December retail sales were soft and the trade deficit widened moderately though sterling held firm.

Yesterday, the pound was trading at MUR 48.84 as against MUR 48.20 on last Tuesday.

Major data/events this week: Wed 14 January

GB ILO unemployment, US Beige Book, US PPI

Thu 15 January US jobless claims, US NY Fed Manufacturing, US retail sales

Fri 16 January US industrial production, US Michigan Consumer Sentiment Mon 17 January

Ger PPI, EZ industrial production Tue 18 January

Ger ZEW index Contribution by HSBC