The US dollar faced significant pressure throughout the week as the euro ignited a broad-based buying to breakout from a four-week trading range to reach its highest level in two months. Rumor has it that oil rich countries, reaping record crude prices, have been busy diversifying their dollar-heavy reserves into euros.

The market reacted by ignoring the fundamental drivers of a bullish US economy and hawkish comments from the Federal Reserve and plunged into responding to technical breaks. In addition, the dollar decline was due partially to position adjustments after its steady climb in the mists of rising US interest rates and a US economy in its full expansionary phase.

The breath of fresh air that the dollar needed finally came as stronger-than-expected US job data reinforced expectations that the Federal Reserve would continue raising rates at a measured pace this year. According to the Labor department, in July 207,000 new non-farm jobs were created beating economists? median forecasts of 188,000 jobs and justifying more interest rate hikes. Higher interest rates tend to boost a currency because they offer investors a higher rate of return and make it more expensive to short sell a currency. However, the dollar gains were still too shy and only managed to barely break out of a narrow range against the euro through key chart levels. The greenback traded flat against the euro as the market was awaiting the Federal Reserve to deliver its 10th straight quarter-point increase in its Fed rates taking it to 3.50 percent. The single European currency has fallen about 10 percent against the dollar this year in the face of the US dollar widening interest rate advantage and amid tepid economic growth and concerns about political unity in the euro zone.

Against the Mauritian rupee, the dollar was trading at MUR 29.92 yesterday compared to MUR 29.90 a week earlier. The yen threatened by political uncertainty.

The yen firmed towards the end of the week against the dollar, supported by a rise in Tokyo stock prices and improving economic fundamentals in Japan. However, market traders were still debating whether or not to push the dollar aggressively in either direction before the outcome of the interest rate hike in the US. The bank of Japan kept its monetary policy unchanged after a two-day meeting on Tuesday. On Monday the yen was under severe pressure from the dollar as Japanese Prime Minister Junichiro Koizumi followed through a threat to call a snap election after the parliament voted down his prized postal reform bills. The market was also awaiting the government?s forecast for machinery orders data for June.

Against the Mauritian rupee, the yen was trading at MUR 26.89 as compared with MUR 26.87 a week earlier. Sterling fell off its peak as the Bank of England cut interest rates.

The pound lost ground against the greenback on Thursday after the Bank of England cut the UK?s interest rates for the first time in two years in line with market expectations. The Bank of England cut its official rate by 25 basis points to 4.5 percent to shore up household and business spending. The sluggish economy and worries over consumer spending since the July 7 bombings in London and a failed attack two weeks later had already stroke expectations of a British rate cut.

Against the Mauritian rupee, the Sterling was trading at MUR 53.54 yesterday as compared with MUR 53.06 a week earlier.

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

<B>Wednesday 10 Aug</B> GB BOE inflation report US Mortgage Index, Fed budget, Fed rate

<B>Thursday 11 Aug </B> US jobless claims, Retail Sales

<B>Friday 12 Aug </B>

US Intl Trade, Michigan Prelim

<B>Monday 15 Aug</B>

US Capital Net Flows

<B>Tuesday 16 Aug</B> GB CPI US CPI, Redbook

<B>Contribution by HSBC</B>