THE EURO traded below the $1.25 level yesterday in late Asian sessions, buffeted by speculative trades ahead of the European Central Bank (ECB) rate-setting meeting tomorrow.

Earlier, traders have dumped the single currency on views that the ECB may resort to a rate cut in order to dampen the euro?s rise. The arguments in favour of the rate cut are as follows: slower than expected money supply growth, reports that the ECB?s staff is revising down inflation and growth forecasts for this year, and calls from German (German Chancellor Schroeder) and French (Premier Raffarin) officials for a rate cut.

Some observers also cite last week?s ECB repurchase pact at which the ECB accepted all the tenders submitted. Each of the 7 interest rate cuts in the current easing cycle were foreshadowed by similar repurchase pacts. However on Monday, the euro rose back after speculation for monetary easing faded.

A report by Medley Global Advisors, a prominent macroeconomic and political risk research firm, discounted away prospects of such a rate cut. The arguments against the rate cut appear to be as follows: real rates are near -zero and are not an obstacle to recovery, interest rates are too blunt of an instrument to confidently cap the euro, verbal intervention has been sufficient to inject a better two-way market, and a rate cut would reward countries who have largely failed to demonstrate fiscal discipline.

New trading directions

The ECB?s meeting thus stands as a major focal point in terms of providing new trading directions in the market. Whilst few in the market expect a rate cut to be delivered, market players seemed to have cut long positions in the single currency, providing tough resistance above the $1.26 level.

Against the Mauritian rupee, the common currency was trading at MUR 32.25 as compared with MUR 32.45 a week earlier.

The yen traded above the JPY 109 level last week as the dollar recovered through profit-taking in the euro, with Japanese authorities jumping in to further widen the yen?s fall. Although Japanese intervention is still conducted in a covert fashion, many observers suspect that tactics have become more aggressive since the early February?s G7 meeting.

Specifically, many suspect the Bank of Japan has intervened to buy dollars even as the greenback has been distanced itself from the JPY105 level. Officials have confirmed selling JPY3.34 trillion (~$31.5 bln) between January 29 and February 25. Combined with January?s JPY7.1 trillion means that this year?s intervention, thus far, has already totalled about half of all of 2003?s record intervention.

Most guesses of what might lie behind the suspected intervention in recent days, tend to focus on the possible desire to build a cushion-breathing space-ahead of the seasonal repatriation ahead of the fiscal year end on March 31. Weekly Ministry of Finance data indicates that Japan has experienced a net inflow of portfolio capital for the past six consecutive weeks. Yesterday, the Japanese currency was offered at MUR 23.95 as compared to MUR 23.99 on last Tuesday.

Sterling traded near 11-year highs versus the dollar last week after the previous week?s huge profit-taking rally saw the pound relinquish some gains. The market has now shifted back focus to prospects of currency-supportive interest rate hikes in the UK, especially following the release of upbeat growth data. Official statistics showed Britain?s economy grew faster than expected in 2003, well ahead its European couterparts. The pound has been a popular buy for investors against lower-yielding currencies such as the euro and dollar, with the Bank of England raising interest rates twice since the start of November, taking UK rates to 4 pct.

Yesterday, the pound was trading at MUR 48.67 as against MUR 48.49 on last Tuesday.

Contribution by HSBC