The dollar started the week on a strong footing bullying most currencies across the board. Amongst the G7 currencies, the euro was hammered after the release of the German economic data that cast serious doubts about the economic outlook for the single euro-zone economy.

The ZEW economic research institute stated that the economic expectations indicator for Germany, the largest economy in Europe, slipped to a five-year low after a trail of seven successive months of declines. According to market analysts, the European Central Bank would still maintain their determinations to hike up rates above the prevailing 3 percent; nevertheless, the ZEW was a definite blow to interest rates expectation in the euro-zone.

Recently, investors had been betting on higher interest rates in the euro zone and save from some hawkish speech from FED officials, their attentions would increasingly revert to external imbalances now that the Fed tightening campaign appeared to have ended.

The US currency crept higher in midweek despite data showed a sharp decline in US existing home sales last month. July home sales fell to their lowest level since last year. According to market players, the once booming housing market only gave clues that the US economy was slowing down. However, bets kept on pilling up upon the dollar after investors’ selling momentum dried out. Consequently, they started liquidating their euro holdings to close out their short dollar positions. Some analysts believed that the US currency was able to shrug off the poor housing data because investors focused on a component showing a rise in the median home price. But other eyed it as short-lived marginal recovery especially given the accumulating evidence of a housing decline. For several years, home price appreciation had been the main driver behind the US growth, and signs that the sector was cooling had led some economists to predict that the FED could even cut interest in 2007.The US dollar traded at MUR 32.552 yesterday, same as last week.

<B>British pound catalyzed by fast economic growth</B>

The yen took a beating last week as soft Japanese inflation data cemented expectation that interest rates would remain low in Japan. Japan’s core consumer price index rose less than expected in July, reinforcing the view that the Bank of Japan would be less inclined to raise interest rates in the near future. The yen was partially helped after China’s central bank took measures to clamp down on robust credit growth and investment.The yen was sold at MUR 28.14 as compared to MUR 28.31 last week.

Sterling was up on the dollar as after British industry data came out stronger than expected. The Confederation of British Industry order’s balance rose to –8 in August from –11 in July. This was the highest recorded balance since Dec 2004, beating analysts forecast of –12. In addition, the pound was catalyzed when the British economic growth reached its fastest rate in two years in the second quarter. The second estimate, unrevised from the previous showed growth rose 0.8 percent on the quarter and 2.6 percent on the year. Consumer spending shot by one percent on the quarter as the World Cup soccer tournament increased demand for flat-screen TVs, food and drinks.The Sterling was traded at MUR 62.28 as against MUR 62.09 last week.

Major data/events this week :</B>