The market went thru a roller coaster ride last week as traders pondered on the possibility of another US interest rate hike in August. Actually, the US Federal Reserve Chairman, Ben Bernanke, was blowing hot and cold air on dollar bulls keeping them on their toes.

The greenback rose to a three-month high on Tuesday after a report showed that US producer prices grew higher-than-expected by 0.5 percent in June, fuelling market?s expectation of another interest hike in August. Dollar sentiments buoyed considerably, as data showed that the US attracted a net $69.6 billion of capital inflows in May, more than enough to cover that month?s deficit of $63.8 billion.

The dollar advanced through a technically-driven market, triggering automatic dollar buy orders and appeared capable of brushing off any kind of negative data. Indeed that was not the case, as the dollar rally ran out of steam when focus suddenly shifted to the CPI data and Bernanke. Traders braced to the sidelines monitoring the Fed chairman Ben Bernanke?s semi-annual testimony before the Congress.

The FED chairman was expected to stick to the tone of the statement released after the latest FOMCC policy meeting last month when he stated that the FED expected slow growth to calm down price pressures. According to analysts, any hint at the word ??pause?? or any of its synonyms in relation to the Fed tightening campaign would immediately incapacitate the greenback.

The dollar was very well sustained by geopolitical factors in the previous week, as conflict between Israel and Lebanon-based Hizbollah guerrillas prompted some US?based players to repatriate cash into the greenback out of riskier assets like stocks.

<B>Inflation tapered off in the long run</B>

Speaking in front of the Senate Banking committee, Bernanke stated that core inflation was expected to fall in the coming quarters and also revealed ?significant uncertainty? surrounding the path of the US interest rates. The dollar immediately nose-dived, falling 0.75 percent against the euro. According to analysts, Bernanke gave clues that inflation might be tapered off in the long run and that FED?s tightening campaign had shifted monetary policy from accommodative to restrictive.

Towards the end of the week, the dollar resurfaced as some investors bet that the three-day dollar sell-off, ignited by the FED?s Chairman less hawkish stance, might have gone too far. Consequently, many currency strategists believed that market players were repositioning themselves ahead of a string of US economic data including GDP numbers, coming out this week, to take advantage of a possible dollar rally. The dollar had traded at $1.2797 against the EUR on Friday.

The US dollar traded at MUR 31.554 yesterday, compared to MUR 31.31 last week

The Sterling roared and flexed its muscles throughout most of last week trading sessions, gathering momentum on a string of robust data. Consumer prices rose 2.5 percent on the year in June, its biggest jump since September 2005. This compelled investment bank RBS to change its interest rate view to predict a 25 basis point rise in the UK?s interest rates as soon as next month. The rise of the pound continued as stronger than expected UK retail sales data added solid arguments to the case for a rate hike. Retail sales rose 0.9 percent in the month of June, higher than the 0.4 percent economists had forecast. The pound?s race continued from start to finish when a report showed that the UK?s economy grew at its fastest pace in two years.

The Sterling was traded at MUR 58.76 as against MUR 57.46 last week. The Japanese currency slid more than 3.5 percent against the dollar since the start of last week, pushing aside the Bank of Japan?s first rate rise in six years to 0.25 percent on Friday. However, market players believed that the interest rates differential between the US dollar and the Japanese yen was too wide to curb the appetite of Japanese investors for high-yielding foreign denominated assets.

Later in the week, the yen got a breath of fresh air, when speculation ran rampant that Bejing was going to announce that it would further unshackle the yuan. The yen managed to hold on to its gain when Beijing stated that it would raise its bank reserve requirements by 0.5 percentage points to cool off its racing economy. The yen was sold at MUR 27.30 as compared to MUR 27.03 last week.

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

■ <B>Wednesday 26 July : </B>

US Chi Fed,

■ <B> Thursday 27 July : </B>

US jobless claims, US durable goods

■ <B>Friday 28 July : </B>

US Empl cost, US Michigan final, JP Manufact. PMI ■ <B> Monday 31 July: </B>

US Chicago, GB Mortgage Lend, GB Consum Credit, EZ Econ sent

■ <B>Tuesday 01 Aug : </B>

US Consumpn, EZ Unempl?t

<B>Vassan Caleemootoo

HSBC Mauritius Treasury and Capital Markets</B>