The US dollar started the week on weak footings tumbling to a two-year low against the euro after the Federal Reserve (FED) took the decision to keep US interest rates unchanged at 5.25 percent. In its accompanying statements, the FED spooked market players by omitting a reference statement to possible future interest rate increases.

Although the FED reiterated that inflationary pressures were still lingering, investors brushed an imaginary portrait that an interest rate cut might be looming around. According to analysts, the FED stated that future policy adjustments would depend upon the evolution of inflationary pressures and growth. This potentially could mean that the next FED’s move might be a interest rate cut.

On the other hand, market players were more excited about further hike in the euro zone putting the common currency in a position to bite into the dollar’s yield advantage. This caused the euro to buoy, vaulting it to $1.3390; it’s highest since March 2005.

Financial markets were increasingly aware that inflationary pressures still existed in the US economy, as consumer prices had not fallen below the comfort zone of 2 percent.

However, investors felt the jitters about the health of the US economy particularly in times when defaults in sub prime mortgages spread like fire among the dry bushes to other parts of the housing markets, eventually pulling the bridle on growth. Many spooked traders had unwound risky carry trades fuelling the demand for low-yielding currencies like the yen and the Swiss franc. In addition, the release of dovish US manufacturing and output data did nothing to quell the concerns.

The US currency regained some of its composures towards the end of the week as investor’s hunger for risks came crawling back. Analysts believed that since the FED had dropped its bias towards rising rates and was in fact keeping a close watch on inflation, some level of confidence has been restored in the greenback. This encouraged traders to warm up to the FED, as they believed that the economy would be steered to a soft landing. Against the Mauritian rupee, the dollar was trading at MUR 32.933 yesterday compared to MUR 33.034 a week earlier.

Sterling went thru a roller-coaster ride throughout most part of last week trading sessions. In fact, the pound started the week on the low side after dovish Bank of England’s minutes dampened expectations of an interest rate rise in the near term. The minutes revealed that Monetary Policy Committee member David Blanchflower voted for a rate cut while the other eight members agreed to hold the rate. Consequently, the pound dipped, as investors were expected a near-term hike in the wake of above-forecast inflation data.

On the hand, the foreign exchange market barely flinched to the presentation of Britain’s 2007/8 budgets, which showcase a reduction in corporate tax and a deferred reduction in the basic rate of income tax.

However, Sterling vaulted to a $1.97, a six-week high, after robust retail sales data pumped expectation in investors. According to the Office for National Statistics stated that UK’s retail sales volumes rose 1.4 percent in February beating analysts’ expectations. Against the Mauritian rupee, the Sterling was trading at MUR 65.04 yesterday as compared to MUR 64.41 a week earlier.

The yen had quite a non-eventful week, as Japanese institutional investors were reluctant to take positions ahead of Japan’s financial year-end on March 31. Risk adverse investors were still fearful that sell-offs in the equities market had not yet run their course. Historically, Japanese would resume buying foreign bonds and other foreign denominated assets in April to compensate for the lowly domestic yields. Against the Mauritian rupee, the yen was trading at MUR 27.88 as compared to 28.19 same as a week earlier.