The dollar rallied against the euro, bolstered by unexpectedly resilient US data that prompted investors to trim down the implied chances of the Federal Reserve easing on interest rates later this year. The greenback traded near six-weeks highs as traders adjusted their short positions.

Dollar sell-off was quite a popular strategy among traders, but as expectation of an interest cut eased, traders found no reason to go long euro. In fact, even a strong reading of the ZEW survey of German investors sentiment failed to give the euro a boost. However, many analysts still believed that the euro might trade higher. Euro zone data had remained consistently upbeat; despite the euro?s inability to snap up the chance to advance thru technical barriers in the past couple weeks. Towards the end of the week, the dollar vaulted high as new home sales data in April soared to their fastest pace in almost 14 years. In addition, a batch of robust economic data led to believe that the US recovery phase was well under way. The euro fell to $1.3415 on the electronic platform, but many traders believed that would be the furthest low the euro could get. A few weeks ago, according to analysts, a dollar consolidation was underway empowered by a raft of dollar-positive data. Traders, as a result, were more inclined to go for a dollar neutral position. The durable report released last Thursday showed that US durable goods orders for March had been revised sharply, fuelling a dollar rally. On the other hand, Eurodollar futures had changed its outlook by reflecting a less than 50 percent chance that the FED would cut rates by the end of 2007. In sharp contrast, the euro futures factored in a more than quarter percent chance of a rate cut at the beginning of the year. Against the Mauritian rupee, the dollar was trading at MUR 31.994 yesterday same as a week earlier.

Geopolitical concern resurfaced as news hit the market that North Korea had fired several short-range missiles into the Sea of Japan. The wobbling yen immediately took a hit. It however, resurfaced as Japanese traders reversed short positions on a drop in regional stock markets. Japan?s broad TOPIX share index dropped 1.6 percent and other Asian markets took a hit of nearly 1 percent following a pullback in Wall Street share. Market players had borrowed the yen at low rates to fund the purchase of higher-yielding currencies and assets in carry trades. Besides, Japan?s core inflation fell at a slower pace than expectation reinforcing the view that the Bank of Japan would raise rates in the coming months. With Japan?s steady economic expansion, expectation had mounted that interest rates would rise to 0.75 percent from the current 0.5 percent in August or September following parliamentary election in July. Against the Mauritian rupee, the yen was trading at MUR 26.34 as compared to 26.57 same as a week earlier.

Sterling rose across the board with market players waiting impatiently for the minutes of Bank of England for clues whether more rate hike would be possible. The BoE raised interest rates to 5.50 percent earlier this month, putting the pound among the highest yield currency of the Group of Seven economies. Currently, the market had already priced in another rate hike by September and giving approximately 25 percent chances of rates reaching 6 percent by year-end.Against the Mauritian rupee, the Sterling was trading at MUR 63.47 yesterday as compared to MUR 63.06 a week earlier.

Major data/events this week:

Wednesday 30 May

US Mortgage indx, MBA

Thursday 31May

US Jobless Claims, GDP

Friday 01 June

US Core

EZ GDP

Tuesday 05 June

US Durable, MBA, Mortgage

Vassan CALEEMOOTOO

Contributed by HSBC