The bombing of Beirut airport by Israel in retaliation for rockets fired into its territory? the collapse of talks between South and North Korea over a missile crisis?the tug of war between Western powers and Iran over Tehran?s nuclear program?spooked investors into buying the safe haven currencies like the US dollar, Swiss francs and Gold. Contrary to market beliefs, the US deficit was not the hyperventilating factor triggering currency rallies.

Actually, the dollar started on a weak footing, sliding on growing market?s expectation of a higher US trade deficit. Many analysts forecasted a US trade deficit of $64.90 billion due to surging oil prices. However, the US government came up with a completely different story stating that the international trade deficit expanded in May to $63.84 billion from a downwardly revised $63.34 billion in April. The dollar tone suddenly turned upbeat as the rally continued in late trading session in New York that day.

More support added to the dollar as global tensions sparked safe-haven buying. This pushed the world?s premier reserve currency to strengthen against the major currencies. According to currency strategists, the strengthening of the dollar was mainly caused by a flight to liquidity as opposed to a flight to quality. The US dollar, being the most liquid of all currencies, could be temporarily parked in the short run before being deployed in other assets. The US dollar traded against the EUR at 1.2521, up by one percent compared to $ 1.2881 earlier in the month.

An unexpected rise in the weekly US jobless claims also buoyed the already robust US dollar. In addition, the report on the US factory output data showed a 0.8 percent gain, leading the markets sentiments towards another US interest rate hike in the near future. However, market participants were still unsure as to whether the Federal Reserve had a hike of 0.25 basis points for the August policy meeting up its sleeves. The US dollar traded at MUR 31.31 yesterday compared to MUR 31.18 last week.

<B>Widening UK trade deficit</B>

The Sterling continued its downward trend against the US dollar in last week?s trading, mainly due to positive dollar sentiments and to mixed UK?s economic data. UK?s trade deficit with the rest of the world widened against economists? expectation in May. In fact, Britain?s trade gap grew to 6.753 billion pounds in May from a downward revision of 5.568 billion in April.

The British Retail Consortium said retail sales rose by 2.3 percent year-on-year in June, down from 3.6 percent in May. However, analysts still believed that consumer spending in the near future could slow, decreasing expectation that interest rates in the UK might rise. The UK pound hit a low of $1.8177 against the US dollar last week. The Sterling was traded at MUR 57.46 as against MUR 57.94 last week.

At last for the first time in six years the Bank of Japan raised the yen overnight rate by 0.25 percent from zero and that despite Government of Japan?s contrary views. However, the momentum in the yen rally was lost when the Japanese Finance Minister remarked that further tightening might be slow.

As the dollar strengthened across the board due to escalating geopolitical tension and widening dollar-yen interest rate differential, the yen could not keep pace and nose-dived . The yen was sold at MUR 27.03 as compared to MUR 27.61 last week.

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

■ <B>Wednesday 19 July : </B> US Mortgage index, US CPI

■ <B>Thursday 20 July : </B> US jobless claims, JP BOJ minutes

■ <B> Friday 21 July : </B>

<B>Monday 24 July: </B>

■ <B>Tuesday 25 July : </B>

US Home sales

<B>Vassan Caleemootoo</B> <I>Hsbc Mauritius Treasury and Capital Markets</I>