Last week trading on the currency market saw the dollar recover from its earlier slide against the major currencies. The greenback had started the week on the back foot against the European single currency on concerns over global central bank reserve diversification, a dive in bond prices and a widening US trade deficit. The dollar had suffered a blow on last Thursday after Japanese Prime Minister Junichiro Koizumi told parliament that, generally speaking, diversity in foreign exchange reserves was a good thing.

The Japanese Ministry of Finance, which manages the world?s largest foreign reserve holding of $840.6 billion, had quickly clarified that it had no plans to shift funds out of its dollar holding. But the specter of central bank reserve holding diversification was raised again, putting pressure on the dollar, much as had happened after South Korea?s central bank mentioned the subject in a report last month. Adding to the dollar?s woes were concerns about the bond market sell-off last week. The price of US Treasuries fell steeply, pushing the yield on the 10-year note up to 4.57 percent overnight, its highest level since July last year. The rise in bond yields is sometimes seen as a supportive factor for a currency, as it offers investors a higher rate of return relative to other fixed income markets. But not this time.

Data?s weakness

Furthermore, the greenback was dented after the release of US data on last Friday. It showed the trade deficit in the world?s largest economy surged in January to a second biggest on record at $ 58.3 billion from $55.7 billion in December. The growing trade gap magnified worries about whether the United States can sustainably finance its massive current account deficit. However, the dollar had made back its lost ground as speculators took profits on the euro, driving the greenback higher.

Against the Mauritian rupee, the euro was trading at MUR as 38.94 unchanged as compared to last week.

Over the week, the Japanese yen gave back some of its earlier gains after an upward revision in Japanese growth data failed to push the yen above its recent one-month peak, prompting investors to dump the Japanese currency. The dollar?s jump against the yen surprised many traders, who had expected it to stay under pressure on worries about the widening US trade gap. Japanese gross domestic product (GDP) for the last three months of 2004 was revised up to growth of 0.1 percent from an initial 0.1 percent contraction, beating expectations for a fall of around 0.2 percent. But some analysts said that despite the upbeat headline figure, the market had focused on the data?s weakness. The main contributor to the upward revision in GDP was a rise in inventories, and this in turn could signal weak demand.

Yesterday, the Japanese currency was offered at MUR 27.95 as compared to previous Tuesday?s 27.94.

Sterling slipped against the dollar, as the market lost interest in relatively high UK interest rates that had been supporting the pound. Sterling had been riding high in recent weeks on growing expectations of an UK interest rate hike later this year. The relatively high UK interest rates had lured investors seeking a higher yield. At 4.75 percent, UK interest rates are the highest in the Group of Seven rich nations. Markets will be looking forward to critical UK data due this coming week, including retail sales and labour market figures.

Yesterday, the pound was trading at MUR 55.83 as against MUR 56.19 last Tuesday.

Major data/events this week:

■ Wednesday 16 March US Industrial Production

■ Thursday 17 March UK Retail Sales, Euro Zone Industrial Production, US Jobless Claims, US Philadelphia Fed

■ Friday 18 March German PPI

■ Monday 21 March

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■ Tuesday 22 March US PPI, US Fed Rate, US Redbook

<I>Contribution by HSBC</I>