The dollar ended the past week on a higher tone as hopes of a US interest rate hike this Tuesday compounded its gains following a major sell-off in emerging markets? currencies into the US currency.

The US currency was influenced at the start of the week by data relating to the US trade deficit. A US Treasury report released on the previous Tuesday revealed that net portfolio inflows into the US rose in January to a second record level of USD 91.5 billion, apparently sufficient to cover for the monthly trade deficit figure of USD 58.3 billion. The greenback firmed from around 1.3360 per euro to flirt with the 1.3300 level on the news. However, on Wednesday, data showed the US trade deficit rose to a record USD 187.9 billion in the fourth quarter of last year, overshooting expectations of USD181.9 billion. That was enough to send investors out of the US currency. To make matters worse, on the same day the price of US crude oil futures surged to a record high of USD 56.46 per barrel, pressuring the dollar further. In addition, talks of diversification of reserves out of the US currency by central banks continued to weigh upon the greenback. From around 1.3292 per euro, the dollar fell as low as 1.3438 per euro.

A sell-off in emerging markets? currencies on Thursday rescued the dollar. A rise in US Treasury yields sparked off exit trades out of emerging markets? currencies like the Turkish lira, the Polish Zloty, the South African rand and the Mexican peso into the US currency for investment in US Treasuries. The flows into the USD also helped the currency recover against the euro.

At the end of the past calendar week, the dollar was further boosted by expectations that the US Federal Reserve will increase interest rates on Tuesday (yesterday). The market expected a 25 basis points hike in US base rates (this would have been confirmed by time of publication on Wednesday).

Against the MUR, the US dollar was offered at MUR 29.1697 yesterday compared to MUR 29.11 a week earlier.The yen had weakened to around the 105.20 level per dollar on Monday as the US currency rose across the board, underpinned by US rate hike expectations. It had firmed to 103.91 in the aftermath of the record US trade deficit data. It generally traded in the 104.25-104.75 range throughout the week.Against the MUR, the yen was sold at MUR 27.90 (100 yen) yesterday as against MUR 27.95 the previous week.The sterling dipped below the 1.9000 USD level on Monday on broad-based dollar recovery as traders bet that not only would the Federal Reserve increase US rates by 25 basis points but it could even remove the word ?moderate? to qualify the pace of future rate hikes in its accompanying statement. The focus on US interest rate expectations relegated domestic UK factors in the back seat.The British pound was offered yesterday at MUR 55.37 compared to MUR 55.83 a week earlier.

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

■ Wednesday 23 Feb EZ ECB current account, US mortgage and FOMC

■ Thursday 24 Feb US durable goods and Jobless claims

■ Friday 25 Feb Holiday

■ Monday 28 Feb Holiday

■ Tuesday 29 Mar US Redbook

<B>Contribution by HSBC</B>/