THE dollar pared gains versus the euro on Monday in early European trading sessions after a violent correction witnessed against major currencies on Friday in New York. The greenback rocketed some two per cent against the likes of euro, aussie and kiwie after frustrated position holders took profit and covered their short positions in the US currency.

Nevertheless, the move appears to have been driven more by an adjustment in market positioning than a change in economic fundamentals. Since arguably around the G7 Dubai meeting last September, the market had been accumulating large short dollar positions. Many leveraged funds and speculators now appear to have taken profits, with some even beginning to short the single currency.

A number of considerations appear to be at work. These include: the long-standing objective near 1.30 for the euro was approached, which is also a psychological threshold potentially increasing the risk of an European Central Bank (ECB) policy response. The failure of short-dated volatility to rise earlier in the week when the euro recorded new highs also pointed to the fact that the euro?s rally may have lost steam. The frustration of being unable to push the dollar below the JPY105 level, even after a much stronger than expected Japanese GDP (Gross Domestic Product) report showing a 1.7% Q4 rise versus an expected increase of 1.1% also led to massive sell-off of the yen in favour of the dollar. Nevertheless, the corrective move in the dollar is seen as temporary.

Last week saw a worsening current account deficit for the US, whilst speculation also remains rife that Washington was implicitly favouring a weak dollar to help boost exports. Despite an unexpected 0.5% increase in US inflation figures, economists do not expect the Fed to hike overnight interest rates form a 1958 low of one percent.

Against the Mauritian rupee, the common currency was trading at MUR 32.45 as compared with MUR 32.98 a week earlier.

The yen fell through the roof yesterday in Tokyo as traders joined in the profit-taking wave and dumped the Japanese currency versus the dollar. The Ministry of Finance/Bank of Japan (MOF-BOJ) was rumoured to have helped drive USD-JPY higher this week as each day USD-JPY set a higher low until market participants gave up and cut their long yen positions. The logic of such MOF-BOJ action was thought to be to help prepare for the repatriation associated with the fiscal year end. Additionally, for the fifth consecutive week, Japan reported a new inflow of portfolio investment. Foreign demand for Japanese bonds and stocks more than offset Japanese demand for foreign assets.

A news wire saying Japan had raised its terror alert to the highest level seemed to have been mistranslated from Japanese since Japan does not have a terror alert system similar to that in the US. However, the report provided an excuse to push USD-JPY sharply higher. The story apparently showed that Japan was increasing the security at a number of places such as airports.

Yesterday, the Japanese currency was offered at MUR 23.99 as compared to MUR 24.61 last Tuesday.

Sterling retreated against the dollar on Friday as the currency broke successive technical support levels on profit-taking against the dollar. Earlier during the week, the pound was bolstered by interest rate differential flows. Data showed bullish retail sales and mortgage lending last week, which fuelled speculation of further near-term UK rate hikes. The Bank of England Monetary Policy Committee (MPC) minutes from early February also showed the MPC voted unanimously for a 25 basis points hike to 4.0% as expected.

Yesterday, the pound was trading at MUR 48.49 as against MUR 49.08 on last Tuesday.

Major data-events this week:

Wednesday 25 February

German Gfk index, GB GDP Q4, US home sales

Thursday 26 February

GB Gfk survey, US durable goods, US jobless claims, JP unemployment

Friday 27 February

US GDP Q4, US NAPM NY, US Michigan Final, US Chicago PMI

Monday 1 March

German Reuters Mfg PMI, GB Reuters Mfg PMI, US consumer spending, US ISM Mfg

Tuesday 2 March

EZ unemployment

Contribution by HSBC