Last week trading on the currency market saw the dollar drift near recent eight-month lows versus a rising single European currency, as investors considered the effect of China’s interest rate hike on currencies and the US economic outlook. Markets players were taken aback on last Thursday, when China’s central bank announced it would raise interest rates in an effort to cool its red-hot economy. Market’s initial response to China’s announcement was to buy back dollars that had been sold short in recent weeks. But the greenback quickly softened as traders refocused on the factors that have been weighing on it recently, namely mixed US economic data, low US interest rates, a growing current account gap and uncertainty ahead of Tuesday’s presidential election. Furthermore, comments by an unnamed European Central Bank monetary policy source that no intervention to curb the euro’s strength will be forthcoming unless market moves become more “extreme” also lent support to the euro. The news came after the market had generally settled down in the wake of China’s first interest rate hike in almost a decade. The euro also got a push higher after euro zone data showed inflation in the 12-nation region surged to 2.5 percent in October, further above the European Central Bank’s goal, due to soaring oil prices. This inflation data has raised the prospect of an ECB interest rate hike.

Against the Mauritian rupee, the euro was trading at MUR 36.78 as compared with MUR 37.03 a week earlier.

Over the week, the Japanese yen strengthened to fresh six-month high around 105.80 yen against the dollar following Bank of Japan Governor Toshihiko Fukui comments. He said that recent currency moves were not a risk to the Japanese economy. For the time being, Japanese authorities seemed reluctant to step into the market despite the yen’s rise, with many analysts arguing the coming US election was keeping them at bay.

Yesterday, the Japanese currency was offered at MUR 27.23 as compared to previous Tuesday’s exchange rate at MUR 27.14.

Sterling held a firm footing against the dollar despite softness in the housing data in the UK and a greater degree of confidence that UK interest rates have peaked. Data from the Nationwide building society showed British house prices suffered a monthly fall for the first time in three years in October, falling by 0.4 percent.

Yesterday, the pound was trading at MUR 52.87 as against MUR 53.19 last Tuesday.

<B>Major data/events this week:</B>

-Wednesday 03 Nov US ISM Non-Manufacturing, US Durable goods

• Thursday 04 Nov UK BOE rate & Eurozone ECB interest rate setting, US Jobless Claims

-Friday 05 Nov UK Industrial Production, Euro Zone Retail Sales

• Monday 08 Nov UK PPI

• Tuesday 09 Nov US Redbook, UK Trade Balance

<B>Contribution by HSBC</B>