THE dollar fell sharply on Friday in New York after an eagerly-awaited payrolls figure turned out to be much worse than expected. The US Labour Department reported only 21,000 new jobs were created last month, compared with an increase of 97,000 jobs in January, itself a downward revision. Economists had forecast an addition of 125,000 jobs and investors had been buying the dollar in the run-up to the meeting, banking on an even more bullish figure. However, traders quickly dumped the greenback after the release of the data, trouncing the dollar some 1.8 % lower during the session to $1.2380 (per euro). Friday?s disappointing US jobs data likely signals the end of the three-week US dollar rally against the European currencies. The dollar?s bounce had been fuelled largely by short-covering rather than new outright buying or a fundamental change. The weak employment data reinforces the view that the fundamentals have not changed, that US interest rates will remain low and that the yield curve will remain among the steepest in the world. Elsewhere, the European Central Bank (ECB) left interest rates on hold as expected to 2%. However, ECB President Trichet?s comments were unexpectedly neutral. Many participants had expected, or at least hoped for some recognition that the moderation of price pressures and the strength of the euro would create some room to manoeuvre. However, the ECB passed on the opportunity. That said, speculation of a rate cut will not disappear and most market players continue to expect the ECB to deliver a rate cut in the second half of this year. Against the Mauritian rupee, the common currency was trading at MUR 32.32 as compared with MUR 32.25 a week earlier.

The yen tumbled more than one full cent versus the dollar to a low of 112.30 yen (per dollar) on Monday in Tokyo, despite the greenback itself falling versus major G7 currencies. The G7 meeting in February massaged the language of the Dubai statement and left the impression that non-Japan Asia was the real target in the call for more flexible currency regimes. As this impression took hold, Japanese officials seemed to become more intent on spurring a correction in prices. Specifically, although the covert intervention following the Feb G7 meeting has been reduced in volume terms from the record pace in January, many suspect that Japanese officials have become more aggressive, intervening even as the dollar appreciated against the yen. The sharp rise in the Federal Reserve?s custody holdings lends circumstantial evidence to this view. Many market participants suspect that Japanese officials would be content to see the dollar trade back into the thinly traded area just after the Dubai G7 meeting in the JPY112.50-JPY113.50 area. Yesterday, the Japanese currency was offered at MUR 23.54 as compared to MUR 23.95 a week ago.

Sterling drove higher versus the dollar at the start of the week, capitalising on the dollar?s weakness in the wake of the downbeat US payrolls data. Earlier, the pound retreated marginally after the Bank of England left interest rates unchanged at 4%. In fact, whilst the no-change decision was widely expected, some investors were betting on a chance of a rate hike especially after a strong customer credit and housing market data reading earlier in the week. Analysts say the Bank is mindful of the impact of higher borrowing costs on Britain?s debt-laden consumers and is set to maintain a strategy of modest rate increases. Yesterday, the pound was trading at MUR 48.51 as against MUR 48.49 a week ago.

Major data events this week:

Wed 10 March US international trade

Thu 11 March US jobless claims, retail sales, US midwest manufacturing

Fri 12 March US Michigan preliminary

Mon 15 March US NY Fed Manufacturing, US industrial production

Tue 16 March GB RPI, US Fed rate

Contribution by HSBC