The currency market has been trading in rather tight ranges last week as players were cautious not to open or keep large trading positions ahead of the much-awaited US Federal Reserve decision on interest rates later today. Although a 25 basis points hike in US interest rates is widely expected, market players will rather focus on the accompanying statement for further clues on the future evolution of US interest rates.

The market is focusing on the timing and size of future US rate hikes. A quarter percent hike at today?s Fed meeting has already been fully priced-in by the market and should by itself have little benefit for the greenback. A more aggressive hike and/or more hawkish statements by Fed would usually underpin the greenback.

Last week, the focus was on US inflation-related data releases and the dollar fluctuated in tandem with the strength or weakness of those inflation-related figures. On Thursday, the US currency gave up some ground after weak US durable goods data cooled down market expectations of an aggressive sequence of US rate hikes. Geopolitical concerns also weighed on the greenback after violent attacks in Turkey and Iraq. However, US first-quarter GDP-related data released (namely the so-called price deflator) on Friday showed more inflationary pressures than expected and helped the dollar by pointing to more aggressive monetary tightening by Fed. On Monday, tame US personal income and expenditure data caused the dollar to lose ground; the US core personal consumption expenditure index, a key gauge of inflation, is closely watched by Fed and the weak figure seemed to be consistent with Fed?s measured approach on interest rates.

On the local market, the dollar gained two cents to end at MUR 28.40 on the offer side. The euro rose by 19 cents to MUR 34.54.

The yen hit a two-month high of 107.03 per dollar last week, reflecting the general rally in the Japanese currency as several economic data reaffirmed the strength of Japan?s economic recovery and confirmed investors? confidence in Japanese assets. A strong performance by Japanese stocks also underpinned the Japanese currency.

Market expectations of a strong business sentiment report (the so-called ?Tankan? survey) due for release this Thursday still lent support to the yen on Monday. However, a weaker-than-expected industrial production report was used as an excuse by traders to close their long-yen positions and take profits ahead of the Federal Reserve meeting on US interest rates today. This caused the JPY to give up some gains and edge below the 108 level per dollar.

Against MUR, the yen ended the week at 26.26 (per 100 yen) against 26.18 a week earlier, after peaking to 26.48.

Sterling was hit last week by the release of minutes of the Bank of England Monetary Policy Committee which met early June and by comments by BOE Governor Mervyn King which calmed down market expectations of further interest rate hikes. The minutes contained little to suggest any further rate hikes while BOE?s Governor commented that the British central bank had not abandoned its ?gradualist? approach to raising UK interest rates.

Without immediate prospects of further interest rate hikes, the British pound became vulnerable to market correction. A weaker-than-expected Confederation of British Industry survey also weighed on the sterling.

The pound was sold yesterday at MUR51.88 against 51.93 a week earlier after dipping to 51.46 on Thursday.