Positive dollar sentiment bolstered the US currency across the board while dovish economic data undermined the euro. The Germany?s key ZEW survey on investor sentiment hit an eight-year low in September, pushing the European currency over the edge.

However, the common currency?s fate was not sealed yet. Slowly but surely the market focus changed moving away from the greenback to the euro. Market players were gearing up for the next European Central Bank?s interest rate hike. The US housing data showed a 6 percent decline while core producer prices, dropped by 0.4 percent. In addition, the Federal Reserve Bank, at its policy setting, kept the benchmark overnight rate at the target of 5.25 percent. This prompted analysts to thinking more and more that the FED was thru with its tightening campaign and that the cooling down of the US economy would in itself curb price pressures. Fed fund futures indicated that there were only 6 percent that the central bank would raise rates by another quarter percent in the month of October. The prospects of steady US rates detracted from the dollar allure to foreign investors. Since the US rates had been the highest in the Group of Seven rich nations, the greenback benefited from carry trades whereby investors bought higher-yielding assets by selling lower-yielding currencies such as the yen or the Swiss franc.

Towards the end of the week, the dollar lost hold and slid to a 2 month lows after a report showed business activity contracted in the US Mid-Atlantic region in September for the first time in three years. Pressures on the dollar already surfaced after the Fed left the rates unchanged, but the Philadelphia Federal Reserve fuelled expectations that FED?s next move could be a cut as opposed to a rise. Other components in the report used as indicators of nationwide factory activity showed relative softness.

Decline of the yen and of Asian currencies

The dollar recouped some of its lost against a backdrop of growing risk aversion in world markets. Amidst geopolitical uncertainty in Thailand, Hungary, Poland, and Brazil, investors ditched high-yielding currencies and bought back the dollar. In fact, emerging markets suffered a lot especially after the collapse of Poland?s coalition government, violence over a political scandal in Hungary and in Brazil, and a military coup in Thailand. The US dollar traded at MUR 32.713 yesterday, same as last week.

The yen kept marching on especially after the Group of Seven Finance Minister called for the Japanese currency to reflect Japan?s economic growth. Also the market took in stride a coup in Thailand and the expected election of hawkish lawmaker Shinzo Abe as president of Japan?s ruling party.

The ousting of the prime minister by Thai armed forces sparked a decline in several Asian currencies including the yen, reviving memories of the Asian financial crisis a decade ago. However, the effects were short lived as market players were keen to hear what BOJ Governor Toshihiko Fukui regarding the weakness in the yen or any hint regarding BOJ hikes this year. In addition, the yen got some stability when data showed Japan?s trade surplus at 200.5billion yen ($1.71 billion) in August. The yen was sold at MUR 28.68 as compared to MUR 28.32 last week.

The pound gained for most part of the week as a speculation ran like wild fires in dry bushes among market players that the Bank of England might be hiking up UK?s interest rates again. During the week the BoE Monetary Policy Committee minutes showed that policy members voted 8-0 to keep the interest rates intact. In addition, the minutes indicated that the UK policy makers were getting vigilant about inflationary pressures. Data released the same day after the BoE minutes showed that mortgage lending rose by 6.2 billion pounds. The Sterling was traded at MUR 63.24 as against MUR 62.69 last week.