Volatility in both domestic and international markets pushed notorious currency traders in Mauritius to seek refuge on the exotic island of Île-aux-Cerfs for a brainstorming session. Many of them concurred that the crux of the dollar woes was not just mere US fundamentals but the need for a market correction. They also believed that US interest rates would drop in the second half of the year to stimulate a slowing US economy.

The greenback had a slow descend despite some brief rallies. Solid US services sector data did support momentarily the dollar. According to the Institute of Supply Management’s, US non manufacturing index for April rose more than economists had forecasted. Besides, a surprise rise in productivity and a fall in labor costs, gave an impression that the US economy might be heading out of the bad patch afterall.

However, the US payroll for April put the dollar back into the woods suggesting that the economic slowdown might have caught up with the labor market. Median forecast were for a payroll increase of 100 000 jobs in April with jobless claims ticking up to 4.5 percent. But Wednesday’s report showed that only 88 000 jobs were created. As dovish US data cast a cloud onto US growth, the euro bolstered to above $1.3680.

The recent batch of dovish data from the US fuelled expectations that the Federal Reserve would cut rates in the near future though the timing was uncertain. The Fed would be widely expected to keep US interest rates unchanged at their monthly meeting this week; however, the focus would be on the verbiage that the FED would use in its accompanying statement. On the other hand, signs of expansions in Britain and in Europe reinforced the idea that interest rates in those regions would go up added further pressure to the dollar.

The European Central Bank would be expected to keep rates in the eurozone unchanged at 3.75 percent at this week’s meeting but to signal a hike in June. In addition, analysts also believed that the victory of Nicolas Sarkozy in the French presidential election provided modest support to the euro. Market players believed that Sarkozy’s policies would aim at making the labor market more flexible and promoting market-oriented policies to improve economic growth. Against the Mauritian rupee, the dollar was trading at MUR 31.994 yesterday compared to MUR 32.247 a week earlier.

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