The dollar was in the driving seat, riding a comfortable interest rate differential over the eurozone, Japan, and the UK. It crept a tad higher after a slew of US economic data landed mostly in line market expectation.

Economists believed that the Federal Reserve kept the US interest rate on hold at 5.25 percent in early August, as economic growth was slowing down dragging, with it inflationary pressures. Traders skewed their positions in favor of the euro especially after Jean-Claude Trichet signaled that the European Central Bank might be raising interest rates in the eurozone to combat inflationary tendencies. However, in a technically-driven sessions, the dollar rebounded as traders were awaiting the release of the US job?s report. Such report would shed some light on the direction the US currency was heading. Currency strategists believed that wild swing in payroll growth might trigger violent swing in currency market.

The decision of ECB to leave the interest rates in the eurozone unchanged was little or no surprise to the market. However, traders were still shifting the interest rate differential in favor of the euro and away from the dollar. Many traders were quite aggravated as the market failed to move the dollar out of its narrow range. Toward the end of the week, the US currency took a hit as the US showed modest job growth. In fact, jobs in the US rose by 128,000 jobs beating slightly the forecast, but were in no position to move market expectation away from the overall consensus that US growth was slowing down and that inflation was easing down as well. In addition, US manufacturing survey for August were also in line with expectations but the Institute of Supply Management?s manufacturing index came out dovish showing a reading of only 54.5 last month. The FED had consistently increased the US interest rates and more pauses would erode the US dollar?s yield advantage especially as both Europe and Japan had started their moves towards a tighter monetary policy. The US dollar traded at MUR 32.602 yesterday, as opposed to MUR 32.552 last week.

<B>Japanese yen on downbeat tone</B>

The Japanese yen started the week on a downbeat tone when data showed a weaker-than-expected rise in consumer prices triggering a wave of yen selling. Things did not add for the yen, which succumbed to another slew of weak data. The Japanese Industrial output figures came out below forecast pushing investors to hunt for higher yields in other currencies. The yen rebounded towards mid-week after a government survey showed Japanese corporations increased capital spending by 16.6 percent in April-June quarter compared to a year earlier. Besides, bets were also heavily piled against the Japanese yen and the latter might benefited in the event traders decided to unwind their short yen positions. Towards the end of the week, analysts? expectations were somewhat realized as traders started to unwind a raft of short positions ahead of The Bank of Japan?s meeting. The market were anxious to hear what BOJ?s governor, Toshihiko Fukui, had to say about the Japanese economy. Anticipations were on the high side after hawkish capital expenditure figures were released. For the time being, market players believed that the market would remain murky until clearer views could be obtained.

The yen was sold at MUR 28.73 as compared to MUR 28.14 last week.The pound spiked to its highest level against the US dollar in weeks, fuelled by stronger-than-expected retail data showing that the past month interest rate hike had not significantly dented consumers? demand. The Confederation of British Industry?s distributive trades survey showed retail sales growth jumped to +12 from +7 in July, increasing to its fastest pace in 1-1/2 years. However, many analysts concurred that last month?s hike was not a precursor to more tightening measures later in the year. The Nationwide Building Society survey showed house prices rose 0.8 percent on the month, coming to par with July?s monthly gain and bolstering the annual rate of house price inflation to 6.6 percent. The Sterling was traded at MUR 62.89 as against MUR 62.28 last week.

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

<B>Wednesday 06 Sep : </B> US mortgage, Redbook

<B>Thursday 07 Sep </B>: US Jobless claim

<B>Friday 08 Sep : </B>JP BoJ decision

<B>Monday 11 Sep: </B>

<B>Tuesday 12 Sep : </B> US Redbook GB PPI

<B>Vassan Caleemootoo

HSBC Mauritius Treasury and Capital Market</B>