Last week saw the dollar plummeting to record lows against the euro as the market shrugs of the relatively quick resolution of the US presidential election to re-focus on the gaping US trade deficit. Initially the dollar steadied itself as US economic indicators for October showed that employment was increasing at an encouraging rate. This concurred with the data in the other financial markets as stock prices and bond yields rose to meet the upbeat monthly payroll report. However, the market turned the table on the dollar as traders started selling aggressively the US currency with the opinion that the dollar would inevitably fall as long as the US was running a gaping current account deficit. Currently the US deficit is approximately $427 billion or 3.7 percent of gross domestic product while the current account is sky rocketing to a record $166.18 billion shortfall in the second quarter. To fund those deficits dollars must flow into the country in the form of portfolio inflows. In the event the inflows are not large enough to offset outflows the dollar would fall. A weaker dollar, on the other hand, might help in making US exports more attractive and imports more expensive.

Against the Mauritian rupee, the US dollar was trading at MUR 28.75 as compared with MUR 28.78 a week earlier.

<B>Ouput prices rise</B>

Last week, the sterling hovered around a 10-month low against the rallying euro but steadied against the vulnerable dollar. Towards the end of the week, robust UK’s production price data showed factory gate prices rose to a nine-year high. In addition, the PPI numbers gave the Sterling a boost. According to the British office of National Statistics, non-seasonally adjusted output prices rose by 0.7 percent in the month of October, taking the annual rate of factory gate inflation to 3.5 percent. The focus later this week will be on Bank of England inflation report that might give clues about the future of UK’s interest rate path.

Against the Mauritian rupee, the Sterling was trading at MUR 53.37 as compared with MUR 52.95 a week earlier.

The euro went full steam ahead of a dollar ridden by structural problems in the US. The euro broke the February’s record high by being just below the psychological level of $1.30. According to analysts the European economic policy makers were not too concerned by the rise of the euro as it help to counter the increase in the oil prices on the European economy. However, on Monday, the euro lost momentum after dovish comments from European Central Bank Jean-Claude. According to Trichet the euro’s recent advance was ‘’brutal’’ and ‘’welcome’’. This caused traders to take quick profit from euro sell-off.

Against the Mauritian rupee, the euro was trading at MUR 37.23 as compared with MUR 36.57 a week earlier.

Major data/events this week:

Wednesday 10 Nov

US Mortgage Indx, Jobless Claims

FR Trade Bal’ce

Thursday 12 Nov

US Michigan Prelim

Friday 13 Nov

IT CPI

Monday 16 Nov

US PPI-

Tuesday 17 Nov

US CPI

EZ Ind Prod

<I>Contribution by HSBC</I>