Last week trading on the currency market saw the dollar surged to a fresh nine-month high against the European single currency on the back of narrower-than-expected US trade deficit and Federal Reserve Chairman Alan Greenspan upbeat comments on US economy. US trade gap released on last Friday widened to $ 56.96 billion in April - the fourth widest on record – but was narrower than the $ 58.0 billion anticipated by economists.

The numbers suggested that slightly less foreign capital was needed to fund the US trade deficit, easing the financing pressures that had weighed on the dollar in recent years. The greenback also strengthened after Federal Reserve Chairman Alan Greenspan said that the US economy was on a firm footing and that US interest rates could continue to rise at a measured pace. Greenspan’s comments helped to dispel worries prompted by Dallas Fed President Richard Fisher’s suggestion last week that the US central bank was in the final stages of its tightening cycle. The widening interest rate differential, which supported the dollar over its major rivals, had been the key to the currency’s rise by about 10 percent against the euro this year. Earlier in the week, European common currency had briefly recovered against the dollar, after heavy selling triggered by a political crisis in the European Union.

Investors had been encouraged by comments from top euro zone policymakers calming worries that the single European currency might not get enough political support after two founding members of the bloc rejected the European constitution. Various officials had said that calls from a government coalition party in Italy for a referendum on bringing back the lira were absurd, scandalous and irresponsible.

Euro also found some support after Trichet said that he was not preparing for an interest rate cut, reducing speculation that the ECB might lower interest rates to help kick-start a sluggish euro zone economy.

Against the Mauritian rupee, the euro was trading at MUR 35.87 as compared to 37.27 MUR last week.

<B>Gloomy UK data</B>

Over the week, the dollar advanced to an eight-month high against the Japanese currency, as upbeat US economic data and comments by Alan Greenspan raised expectations of more US interest rate hikes. Also, receding expectations of a near-term revaluation of the Chinese yuan was putting pressure on other Asian currencies such as the yen.

Yesterday, the Japanese currency was offered at MUR 27.12 as compared to previous Tuesday’s 27.66.

Sterling fell to an eight-month low against the dollar following major currency pairs, in absence of domestic news in Britain. Investors’ attention will focus on clues about the timing of any prospective UK interest rate cuts. A recent run of gloomy UK data had fuelled expectations for a UK interest rate cut in the cost of borrowing, which many analysts predicted could come later in the year. So far, the Bank of England had kept UK interest rates unchanged at 4.75 percent for the tenth month running on last Thursday.

Yesterday, the pound was trading at MUR 53.39 as against MUR 53.91 before Tuesday.

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

■ <B>Wednesday 15 June </B> US CPI, US Real Earnings, US Industrial Production

■ <B>Thursday 16 June </B> UK Retail, US Philadelphia Fed, US Jobless Claims

■ <B>Friday 17 June </B> Euro zone Industrial Production

■ <B>Monday 20 May -</B>

■ <B>Tuesday 21 May </B> US Redbook

<B>Contribution by HSBC</B>