The greenback experienced seesaw sessions for most part of last week trading as investors were awaiting hints from the Federal Reserve to see whether interest rates might fall before year-end. Many traders were adjusting their positions in a fit of profit taking and to place fresh bets.

According to analysts, dollar vulnerability would persist especially in times when US data gave clues that the US economy was slowing down. The central bank kept US interest rates on hold at its monthly meeting while re-emphasizing the commitment to combat inflation. The dollar rose across the board as the FED made no mention to March slowdown in core inflation, in payrolls, in industrial production, and in consumer spending. In a statement outlining its decision to keep interest rate uncut, the FED held its view that the economy was likely to expand at a moderate pace in coming quarters. Since the FED shrugged off those data in its accompanying statement, market players interpreted this as a signal that the central bank would keep interest rates intact for the rest of the year. In addition, the US central bank also believe that despite inflation pressures seemed likely to be moderate over time, high level of resource utilization had the potential to sustain that pressures.

US short-term futures fell after the FED ended their policy meeting. Futures showed the market expected the Fed to hold rates steady at 5.25 percent again in June while prospect for a cut in August dropped to 15 percent from 18 percent. In addition, futures priced only one single Fed rate cut for 2007 instead of two. Towards the end of the week, the dollar gained additional support against the European common currency when comments by the US Treasury secretary Henry Paulson reinforced the idea that the US would benefit from a strong dollar.

On the other hand the euro stayed muted when Jean-Claude Trichet stated that the European Central Bank would keep interest rates in the euro zone unchanged at 3.75 percent. In addition, he commented that the ECB would stress the need for strong vigilance to ensure stable prices in the euro zone.

Against the Mauritian rupee, the dollar was trading at MUR 31.994 yesterday same as a week earlier.

Sterling started the week bullying around most major currencies. This was mainly due to the fact that the market was widely expecting the Bank of England to hike up interest rates to 5.5 percent, the highest in the Group of Seven industrialized nations. According to analysts, the widening interest rate differentials between the pound and the dollar would most likely keep the pound above $2 range or close to it especially with the expectation of a fall in interest rates in the US.

However, the pound came under selling pressures as data showed a wider than expected UK trade deficit in March. Furthermore, Sterling succumbed to another blow, when investors unwound carry trades in the face of falling stocks. Against the Mauritian rupee, the Sterling was trading at MUR 63.35 yesterday as compared to MUR 63.97 a week earlier.

The yen posted broad gains as investors took profit from carry trades. The Japanese yen was used as a proxy to fund the purchases of high-yielding currencies and assets. Besides, Japanese investors were selling dollars to bring home funds in excess of $55 billion of US Treasuries maturing next week together with $22 billion of coupon payments. Towards the end of the week, the yen stabilized as Bank of Japan Governor Toshihiko Fukui stated in front of the parliamentary committee that the central bank would steer monetary policy in stages based on the economy and prices, while circumspectly monitoring risk factors. Against the Mauritian rupee, the yen was trading at MUR 26.57 as compared to 27.38 same as a week earlier.

<B>Vassan CALEEMOOTOO</B> <I>Contributed by HSBC.</I>

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

Wednesday 16 May

US Mortgage indx, MBA

JP GDP, BoJ meeting

<B>Thursday 17 May </B>

US Jobless Claims

<B>Friday 18 May</B> <B> Monday 21 May</B> <B> Tuesday 22 May </B>

US Redbook JP BoJ minutes EZ Zew