‘’First I was afraid… I was petrified…” felt a jittery investor amid heightened global volatility and diminished appetite for risk in commodities and emerging market stocks. As the nervousness grew, market players sought refuge in the greenback.

Robust core US producer inflation reading for May pressured traders to unwind short dollar position across global markets and pushed the dollar to new levels against the euro. That report supported the view that the Federal Reserve would hike up rates at the monetary policy meeting next week. Besides, the Chairman Ben Bernanke together with other Fed officials did express discomfort with the prospects of inflationary pressures. Consequently, expectation of higher US short-term interest rates and a potential slowdown in the world largest economy rattled markets and sparked sell-offs in assets that prospered from robust global growth – stocks, commodities, and emerging markets. Continuous unwinding of exposure in the commodities market did nothing but fuelled a rally in the US currency.

For the rest of the week, the dollar remained within striking range against a basket of currencies despite a few setbacks.

A report showed that US capital inflow for the month of April dropped significantly to $46.7 billion, from a revised $70.4 billion in March, and was not enough to cover the US trade deficit of $63.4billion for the month. Despite the downswing in foreign investment, other data still gave comfort to traders who hesitated to accumulate short dollar positions.

<B>The US dollar traded at MUR 30.99 yesterday</B>

The University of Michigan consumer sentiment survey on Friday showed a higher than expected reading while the US current account deficit came out narrower than forecast. Both these reports reinforced the view of a buoyant US economy and that the Fed would hike up the interest rate this month.

On the technical side, dollar sentiment remained positive throughout the rest of the week. According to analysts, the dollar had the word ‘buy’ written all over it and there was a noticeable lack of dollar sellers on the market these past days.

The US dollar traded at MUR 30.99yesterday same as last week.

The dollar held near seven-week high against and the yen last Wednesday as investors traded cautiously after sharp sell-offs in global stock and commodities markets. The yen got a breath of fresh air from the sale of the U.S currency by Japanese exporters and a slight rebound in the Tokyo’s Nikkei stock average a day after the worst one-day percentage loss in two years. The Nikkei rose by 0.3% after tumbling 4.14% on Tuesday and joining other world stock market in stock declines.

According to analysts, the recent sharp fall in the Nikkei and the possibility of worsening business sentiment had caused some in the market to question their forecasts for when the bank of Japan would raise interest rates from near zero. Many expected the Central Bank to lift the rates by 0.25% point in the third quarter possibly early July.

The yen was sold at MUR 27.10 as compared to MUR 27.34 last week. A stronger than expected U.S. core inflation reading spooked the market by fuelling concerns that the U.S. interest rate might be raised interest rates too far, hurting the economy. Immediately the Pound rallied and hit a one-week high against the dollar. However, the pound rally lack impetus and failed to make any headway against dollar; hence, trading half a percent lower despite strong UK data.

The Confederation of British Industry revised up its UK economic growth estimate to 2.4% and forecasted a consumer price inflation of 2.2% for this year before peaking at 2.5% in the first quarter of 2007, well above the Bank of England 2.0% target. The Sterling was traded at MUR.57.38 as against MUR 57.39 last week.

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

<B>Wednesday 21 June : </B>

US Mortgage Indx

<B>Thursday 22 June : </B>

US Jobless Clms, Durables

<B>Friday 23 June : </B>

US C/a Q1, Michigan Prelim, Redbook

<B>Vassan CALLEEMOOTOO

HSBC Mauritius Treasury and Capital Markets</B>