The euro retreated on Monday in Tokyo on profit-taking and amidst rumours that the European Central Bank (ECB) may have intervened to curb the export-crimping rise of the single currency.

Earlier on Friday, the single currency did soar after data showed a 11% increase in the December US trade deficit to $42.48 billion and a deterioration in the Michigan consumer sentiment index. However, late on Friday, traders were spooked after a big European bank was reported to have offered EUR 2 billion, which saw the single currency tick down one full cent in less than half an hour. The ECB, in standard central bank procedure, refused to comment on the rumours.

<B>Fed could be patient</B>

However, the market took the comments as a sign that there may have been some sort of activity, especially in the wake of the G7?s statement warning against excess volatility in the currency markets. Discounting this factor though, the market remains overall dollar bearish. The latter gave up further ground last week in the G-7 aftermath after it became clear the US and Europeans were not prepared to change policies to alter the dollar?s course. Reduced expectations of a Fed rate hike in the near future also weighed on the dollar and supported the higher yielding currencies and emerging markets.

Indeed, Greenspan reiterated at his semi-annual testimony to Congress on Wednesday that, given macro-economic conditions, the Fed could be patient in removing the policy accommodation, and also that the weak dollar was helping to narrow the current account gap. With the US close for the Presidents Day on Monday, global traders were cautious not to take aggressive positions amidst the lack of market depth.

Against the Mauritian rupee, the common currency was trading at MUR 32.98 as compared with MUR 33.06 a week earlier.

The yen was confined to narrow ranges versus the dollar during the week, facing stiff resistance around the 105.30 level, which was seen to be heavily protected by the Japanese authorities.

In January, data showed Japan spent a record seven trillion yen ($66.45 billion) on intervention, in an attempt to protect the export-competitiveness of Japanese exports. Earlier, Japan denied that it could intervene with European authorities to stop their currencies from rising in value against the dollar. Japan?s top financial diplomat, Mizoguchi, failed to comment on the idea, barely one day after Watanabe, head of the Japanese Ministry of Finance international division, said on Thursday the government could not rule out the possibility of coordinated intervention.

Yesterday, the Japanese currency was offered at MUR 24.61 as compared to MUR 24.73 on last Tuesday.

Sterling hit 11-year highs against the dollar during the week, snatching some three percent in value against the greenback. Interest rate differential flows accounted for most of sterling gains, as investors shifted funds away from the relatively low yielding dollar (one percent) and euro (two per cent) to the pound (four per cent). The interest rate outlook also remains bullish, as confirmed by the Bank of England quarterly inflation report which noted a satisfactory price level.

Yesterday, the pound was trading at MUR 49.08 as against MUR 48.62 on last Tuesday.

Major data/events this week:

Wednesday 18 February:

German PPI, US house starts

Thursday 19 February:

German GDP Q4, GB retail sales, US jobless claims, US PPI

Friday 20 February:

US real earnings

Tuesday 24 February:

ECB Balance of Payments, US consumer confidence

Contribution by HSBC