The dollar rallied upwards against other major currencies in the last week’s trading sessions. The trading was mainly influenced by the market’s expectation of a US interest rate hike by the Federal Reserve’s meeting scheduled yesterday. The US dollar was unmoved despite other dovish US data released in the course of last week such as: the fall in the retail sales for the month of August; lower than expected Industrial production data; the US current account deficit of $ 195.7 billion (second largest on record for the second quarter); and the claims for jobless aid shot up by 71,000, the biggest jump in nearly 10 years, as workers displaced by Hurricane Katrina sought to join the benefit rolls.

Furthermore, Philadelphia Fed’s index data of business conditions declined to 2.2, well below forecasts of 14.0. Most economists expect the Fed to raise interest rates by 25 basis points, for the eleventh consecutive time since June 2004, to fend off inflation. This would be broadly positive for the dollar since higher yields boost the allure of dollar-denominated deposits to foreign investors.

The US currency’s ability to gain even on uninspiring data shows that investors look for reasons to buy dollars. Added to last week’s dollar positive sentiment, the August consumer price index rose to 0.5 percent, i.e. by 0.1 percent compared with the market forecasts of a rise of 0.2 percent, showing that pressure from surging energy costs remained relatively contained.

The euro fell more than half percent to a one-month low after the indecisive results from the German elections. The results revealed no clear winners, clouding the outlook for reform in Europe’s biggest economy. The reform-minded opposition leader Angela Merkel’s Conservatives won 225 seats against 222 seats for Chancellor Gerhard Schroeder’s Social Democrats (SDP).

The results were the most inconclusive in post-war German history. This did nothing for the prospect of reform, in Germany or Europe in general, so investors voted with their money and hammered the euro. Given that most likely Merkel would be given the first choice to form a new government and to become Germany’s first woman Chancellor combined with her promises of lowering German unemployment figures and to stimulate economic growth, the possibility of euro strengthening further was expected by traders as the market had already factored in the outcome of the German elections. Yesterday, the dollar traded at MUR 30.147 as compared to MUR 30.076 and the EUR sold at MUR 36.80 as against 37.12 last week.

<B>Katrina’s damage</B>

The Japanese yen dipped against the dollar due to positive US dollar sentiment in the market during the whole of last week’s trading session. The strong demand for the US currency from Japanese institutional and retail investors put the US currency on the ride. Easing of the oil prices and the extent of Katrina’s damage appeared less serious than the initial estimate, helping the dollar. The absence of positive data and a 3-day long Tokyo weekend had a negative effect on the Japanese currency.

The market-friendly Japanese Prime Minister’s comeback had already been absorbed by the traders. However, by the end of this week the Yen recovered slightly due to the rise in Japan’s Nikkei stock index to 13,075.90, the highest since June 2001. Yesterday, the yen was sold at MUR 27.25 as compared to MUR 27.45 last week. Initially the UK currency rose against the dollar due to low unemployment claims of 1,600 for the month of August, as against a forecast of 4,800.

The Annual earnings growth in the three months to July rose to 4.2 percent as against 4.1 percent in the previous three-month period. The sterling started its descent after weaker-than-expected UK retail sales data, its lowest since May. This spurred speculation that the Bank of England might cut interest rates again. Sterling hit a two-week low of $ 1.8046 and continues to slide after the sales data was released. Yesterday, the Sterling was trading at MUR 54.49 as against MUR 54.90 last week.

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

● <B>Today 21 September: </B> US Mortgage index.

● <B>Thursday 22 September: </B> US Jobless claims,

● <B>Monday 26 September: </B> US Home sales.

● <B>Tuesday 27 September: </B> US Redbook, US New homes.

<B>Contribution by HSBC</B>