<B>THE</B> dollar retreated on Thursday prior to the New York open after newswire reports of the terrible Madrid bombing sent the euro higher to around $1.2350.

Fears that Al Qaeda would claim responsibility readily sent the greenback through the roof ? the US dollar has typically been sold on such attacks, whether onshore or offshore, as risk aversion increased and a flight to haven to gold and the Swiss franc mainly, is observed.

On Monday however, the dollar recouped some of the terrorist-inspired losses as the market witnessed deleveraging. This involved the liquidation of higher yielding currencies such as the Aussie, kiwi and sterling and purchases of lower yielding currencies such as the US dollar and Swiss franc. Discounting the terror effect though, the euro had already been rising pre-session, as the US economy took note of a negative payrolls report last week.

Official data showed the US created only 21,000 jobs last month when economists had expected a 125,000 jobs figure. The US January trade deficit also shot to $43.01 billion but the dollar was seen resilient. Interestingly, the investment income surplus rose to $12.5 bln from $3 bln in Q3.

Though the US is a large debtor, it is also an efficient user of capital as the surplus shows. A surplus on the investment income account reflects the fact that the US is earning more on its assets than it is paying on its liabilities.

On its side, the single currency obtained some support following comments by the ECB?s Welteke that the political calls for an ECB rate cut should not be overestimated and that the German economy was very robust in the face of a strong euro.

Against the Mauritian rupee, the common currency was trading at MUR 32.32 as compared with MUR 32.32 a week earlier.

The yen, in a repeat of last Monday and Tuesday, fell 100 pips to about 109.25 around 1pm in New York on Monday. Since last week, rumours were rife Japanese authorities were scaling back large-scale currency intervention on the market. On both days, USD/JPY fell about one big figure (that is, 100 points) from above 112.00 on Monday and from above 111.00 on Tuesday.

However, the market was divided on whether the move reflected an error in passing an official order or a policy signal in reaction to US Treasury Snow?s recent comments about manipulated markets. This time, the move was triggered by a Japanese news story that an unnamed Japanese official, later termed an aide, predicted the BOJ would walk away from large scale intervention by March 31st, the fiscal year end. The market had long speculated that USD/JPY was being artificially supported ahead of this date, which appeared to be the case on Monday.

Yesterday, the Japanese currency was offered at MUR 23.99 as compared to MUR 23.54 on last Tuesday.

Sterling rose in the wake of the Madrid?s bombing news but then retreated as investors reassessed their positions in the light of increased global security alerts.

Earlier, the pound gave up some grounds after data showed the goods trade deficit rose to £5.6 bln in January. Exports to the US plunged 30% due to the strength of the pound versus the dollar.

On Tuesday, the cable was stable to higher as investors braced for next Wednesday?s Chancellor of the Exchequer?s budget speech.

Yesterday, the pound was trading at MUR 47.56 as against MUR 48.51 on last Tuesday.

<B>Contribution by HSBC</B>