The dollar bullied the euro for most of the global sessions of last week gathering strength on solid net flows of capital into US denominated assets. Indeed a wide interest rates differential between the greenback against the euro attracted many foreign investors into purchasing US securities. The September data showed that the United States attracted more than enough capital to finance its gaping trade deficit.

Net capital inflows surged to an impressive record of $ 101.9 billion in September well beyond the requirement of $ 66.1 billion for that month. Furthermore, the dollar got support from US companies repatriating earnings under one-time tax breaks that would run out at year-end.

Another boost, for the dollar, came after Ben Bernanke?s first testimony that basically reinforced market expectations that the Federal Reserve would keep raising US interest rates. In addition, Bernanke maintained that he would encourage price stability in line with Alan Greenspan?s model. In the past 16 months, the Federal Reserve, due to its strategy to tighten monetary policy, had propelled overnight rate from 1 percent to 4 percent. Market analysts predicted that the Federal Reserve would increase the rates to at least 4.50 percent into next year.

However, the dollar rally became overextended and suffered a major setback in the later part of the week as remarks from the European Central Bank(ECB) chief, Jean-Claude Trichet, stated that interest rates in the euro zone would be set on the move. ?The Governing Council is ready to take a decision to move interest rates and moderately augment the present level of intervention rates in order to take into account the level of risks to price stability,? said Trichet at the banking convention. In fact, Trichet also added that interest rates in the euro zone would go up in December 2005. The market were, however, concerned by the remark of Trichet about the policy remaining accommodative, which put the euro in a less attractive position.

According to currency analysts, the rise in interest rates would have little effect on the common currency as the ECB rates increase had already been factored into the market and that since the US would also increase interest rates, the interest rates differential would not necessarily narrowed down. Against the Mauritian rupee, the dollar was trading at MUR 30.70 yesterday compared to MUR 30.67 a week earlier

Despite foreign buying of Japanese stock to the amount of 4 trillion yen, the yen remained under pressure. Hence, causing foreign investors to start selling the yen forward to mitigate the impact of a falling yen onto their investments in Japan. A month ago, the Bank of Japan fuelled speculations that it might ditch its ultra-loose ?quantitative easing? monetary policy next year.

Boost in public finance

Although the market was not expecting interest rates in Japan to move anytime soon, the speech of Governor Toshihiko Fukui?s comments, in the coming days, would be carefully analyzed especially after a series of warnings from the government against tightening up Japan?s monetary policy. However, market analysts would be focussed on the differences between the Bank of Japan and the Government.

In fact, analysts believed that the sharp rise in the yen was mostly due to the independence gained by the Bank of Japan in 1998. Against the Mauritian rupee, the yen was trading at MUR 25.93 as compared with MUR 25.98 a week earlier.

The Sterling succumbed to a surging dollar, as its interest rate advantages were set to wane. Despite robust mortgage approval data and a boost in public finances in the month of October, Sterling showed little reaction. This was mainly due to growing expectation that interest rates would rise in the euro zone, whereas cost of borrowing in the UK would fall.

In fact, a dovish inflation rate in the UK intensified the Sterling weakness against both the greenback and the euro. The Bank of England kept UK?s interest rates at 4.5 percent for 3 months before cutting it down by 25 basis points in August. Against Mauritian rupee, the Sterling traded at MUR 53.44 yesterday as compared with MUR 53.36 a week earlier.

Major data/events this week:

● Wednesday 22 Nov US Mortgage indx, Jobless Claims, Michigan finals

● Thursday 23 Nov EZ ECB C/A nsa

● Friday 24 Nov GB GDP 2 qq

● Tuesday 29 Nov US Redbook, Durable Gds, Con Conf?ce

Vassan Caleemootoo Contribution by HSBC