The US dollar was propelled to a two-year high against the euro at the beginning of this week after the single currency failed to break up above the key 1.2000 USD level in the aftermath of soft US payrolls data. The euro zone currency initially gained after a report showing the US economy created 56,000 jobs in October, almost half as much as was expected.

However, failure to breach the key 1.2000 level versus the dollar prompted traders to exit long euro positions massively, causing the US dollar to surge across the board.

The move out of the euro in favour of the greenback was also underpinned by the widening interest rate differential favouring the US, following the Federal Reserve?s decision to hike US interest rates by 25 basis points last Wednesday.

The riots in France also maintained pressure on the euro. The latter fell to a low of 1.1710 USD yesterday in Asian trading, it?s weakest since November 2003. Foreign buying of US Treasuries and the potential impact of repatriation of overseas earnings by US companies as part of the Homeland Investment Act also provided additional impetus to the dollar rally.

The greenback rose to MUR30.63 yesterday compared to 30.55 a week earlier. The euro lost 91 cents over the week to sell at MUR 36.05 yesterday. The Japanese yen also bore the brunt of the dollar?s surge, dropping to as low as 118.38 per USD on Monday, its lowest level since August 2003.

<B>US dollar benefits</B>

The Bank of Japan kept its benchmark interest rate near zero percent and is not seen as raising it before next year, leaving the US dollar to benefit from the wide yield differential in its favour. Persistent Japanese buying of US Treasuries continued to provide support to the dollar/yen.

The JPY was offered at MUR0.2616 yesterday, down from MUR 0.2657.The British pound fell heavily during the past week, tumbling from above the 1.7700 USD level a week ago to trade around the 1.7300 level yesterday. The sterling was pressured by unexpectedly weak UK factory output data and the broad-based surge of the US dollar.

The weak data strengthened the view that the end of the Bank of England?s interest rate cutting cycle might be premature; most economists now predict a rate cut in the first quarter of next year to boost growth.The sterling shed 98 cents over the week, falling from MUR 54.34 to 53.36 yesterday.

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

■ <B>Wednesday 09 Nov</B>

German international trade, US mortgage index, UK international trade

■ <B>Thursday 10 Nov</B>

US international trade and Federal Budget

■ <B>Friday 11 Nov </B>

US CPI, retail sales and industrial production; French international trade; BOE meeting on interest rates

■ <B>Monday 14 Nov </B>

UK Producer Price Index

■ <B> Tuesday 15 Nov </B> US retail sales

<B>Contribution by HSBC</B>