The market remained jittery as investors remained on edge due to the turmoil happening in credit markets. The credit meltdown were brought about by losses in bonds which were backed by risky US mortgage debt. Insofar, investors looking for safe-haven had snapped up US Treasury debt despite of its low yield.

The greenback slipped against the euro as the markets were pricing in at least two interest rates cuts to the Federal Reserve benchmark before year-end. The Federal Reserve (FED) had kept its borrowing rate at 5.25 percent since June 2006 and despite the fact that the Fed had cut discount lending rate by 50 basis points, market players were still in a state of apprehension.

According to the US Treasury secretary Henry Paulson, liquidity would return to normal once investors reassessed risks. He also explained that we would not be seeing the bottom of the current credit problem anytime soon. According to analysts, expectations were rising that the FED would cut overnight rates by as much as 50 basis points in the near future.

As the greenback suffered losses, the euro rallied after hawkish comments from European Central Bank (ECB) president Jean-Claude Trichet, insinuated that more monetary tightening was needed in the euro zone to stem off inflationary risks. In addition, the ECB auctioned Euro 40 billion in three-months financing, on top of regular fund to money markets last week, in an attempt to eased market turbulences.

However, toward mid week, business sentiments in the US had resume. US corporate spreads narrowed and the credit crunch had eased a bit causing carry trades to resume. Although the market did not believe that the crisis was over, they still expected market stabilisation to happen after the US senate Banking Committee Chairman Christopher Dodd said Fed Chairman Ben Bernanke told him that the Central Bank would use all available tools to circumvent the fallout from the US mortgage crisis.

The Japanese yen rallied against the US currency for most part of the week after spooked investors shed risky positions after the slide in US stock. According to analysts, the sluggishness in foreign stocks led investors to close down short yen positions. In mid-week the Bank of Japan met and as widely expected by the market kept interest rate in Japan on hold at 0.50 percent.

Sterling started the week suffering the fate of most high-yielding currencies as nervous investors unwound risky carry trades. The pound hit rock bottom when the Bank of England announced that it had lent 314 million pounds thru its standing facility. As market volatility calmed down, Sterling got back on track. Some very keen investors were seen resuming carry trades transactions and that pumped some oxygen into the UK?s currency. The pound got another boost when British factory orders rebounded to their strongest level in over twelve years in August. This fuelled another hot debate about the possibilities of the BoE to hike up interest rates before year-end. The pound rallied after British GDP deflator, a measure of inflation in the economy, hit its highest level since 1996 in the second quarter.

Vassan CALEEMOOTOO <I>HSBC Mauritius Treasury and Capital Markets</I>