At the time of writing last week, the market was awaiting US Federal Reserve Alan Greenspan?s testimony on the US economy for clues on the pace of US interest rate hikes. The Fed chairman left the door open for more aggressive interest rate hikes than anticipated by the market. Greenspan said that the US Central bank would do ?what is required? to keep inflation in check.

The market interpreted the comments as hawkish; indicating that Fed was prepared to hike interest rates faster than expected if inflationary conditions warrant.

A 1.25 percentage hike in US interest rates up to end 2004 is widely expected by the market and is already being priced in by the futures market. Greenspan?s comments left the door open to even more aggressive monetary tightening. The comments sparked a wave of dollar buying as many market players started to unwind dollar-short positions.

From a two-month low of 1.2351USD per euro, the greenback rebounded to around 1.2265 in the immediate aftermath of Greenspan?s speech.

A rise in US interest rates would make dollar-denominated assets more attractive, thus boosting the demand for dollars.

Comments by other Federal Reserve officials at the end of the week reinforced Greenspan?s hawkish stance on US interest rates and fueled more dollar buying.

William Poole, a voting member of the policy-setting Federal Reserve Open Market Committee, said on Friday: ?If it looks like the signal (of inflation) is really there, then my personal position would be that it would be appropriate for the FOMC to move further and faster than priced-in in the market?.

Poole? comments boosted the dollar, sending the euro below the psychological 1.20USD level.

The euro zone currency recovered some lost ground on Monday to trade back above the 1.20USD level after a report showed the US trade deficit widened to a record USD 48.3 billion in April, markedly exceeding market expectations of USD 45 billion.

Against the Mauritian rupee, the dollar was offered yesterday at 28.42 against 28.40 a week earlier; the euro zone currency lost 60 cents over the week, falling from 34.91 to 34.31.

With the pace of US interest rate hikes looking more and more dependent on the pace of US inflation, the market was focusing on US inflation-related data at time of writing yesterday. US core CPI data released late yesterday matched market forecasts and seemed to temper market fears of more aggressive US rate hikes, causing the dollar to lose some further ground.

Sterling fell last Thursday in the aftermath of a widely expected 25 basis points hike in UK base interest rates (from 4.25 to 4.50 percent), dipping below 1.82USD as market players considered that the rate hike had been fully priced-in and started taking profits by selling the pound. However, the pound recovered to trade around the 1.8350 level as investors started to focus on the higher yield on British assets. It retreated at the beginning of the current week, pressured by political jitters following the sharp setback to the ruling Labour Party at the European polls.

Against the Mauritian rupee, the British pound lost 62 cents over the week and was offered at 51.56 yesterday.

The yen was relatively resilient against the surging dollar over the past week, supported by strong Japanese economic data and well performing Japanese stocks. It gave up some ground at the beginning of this week as investors took profits and awaited further clues on Japanese interest rates and US.

The Japanese currency was sold yesterday at MUR 25.71 (100 yen) against MUR 25.87 a week earlier.

<B>Contribution by HSBC</B>