Erosion of the dollar yield advantage?weak US growth rate?poor consumer confidence?downbeat manufacturing data plunged the greenback to the verge of a two-year trough against the euro. Currency market flared with the expectations that the Federal Reserve would cut its benchmark rates by 25 basis points this month.

For the fourth consecutive session, the dollar tested historical lows against the euro on the view that weaker US growth and lower US dollar yield had dimmed the allure of dollar-denominated assets. The FED slashed refinancing rates by 50 basis points last month, the first cut since 2002. Analysts said that the market had already factored in further monetary easing by the FED on its October policy meeting but the size of the cut would depend on September?s economic data. Interest rate futures, on the other hand, were pricing in a 95 percent chance of a quarter-point cut in October, up from 72 percent last week.

The dollar kept struggling to keep afloat and the housing data for August did nothing to quell its pain. In fact, a report on sales of new US homes showed that New-homes sales fell by 8.3 percent in August and this dire number vaulted the euro to a lifetime high of $1.4189. In addition, consumer confidence fell to its lowest level at 99.8 in September, the lowest since November 2005 and down from 105.6 in August. Amid a deepening housing slump and qualms about US economic growth, traders saw the building up of a new case for another 50 basis points cut.

The sentiment on the dollar remained bearish and market players believed that as long as US data remained weak and traders increase their short dollar positions ahead of another FED interest rate cut, the euro might touch the $ 1.45 level.

The US dollar traded at MUR 30.907 yesterday compared to MUR 31.212 last week.

Hot and cold air blew on the Sterling as it maneuvered across the debacle of the US subprime crisis spilling over into the UK?s economy. A press communiqué released last week stated that Britain?s deposit protection scheme, in the aftermath of the Northern Rock crisis, was only worth 4.4 million pounds. This spooked investors and reignited concerns about the health of the financial system in the UK. The pound got another slap upside the head when the International Monetary Funds pointed out the similarities of the UK?s non-conforming mortgage market with that of the US subprime sector. The IMF also stated that turmoil in global credit and money markets would persist, as investors? flight to safer haven would continue. The pound took the hit and nose-dived to $2.0189.

The pound was set on the road to recovery when news hit the market that no financial institution took up on the Bank of England?s offer of a 3-month loan, advocating that credit conditions were easing. The pound got a modest boost when a report indicated that British house prices rose 9.0 percent in September, better than consensus forecast of 8.8 percent. In addition, the battered US currency, which succumbed to record lows, propelled the pound to $2.0264. Towards the end of the week, Sterling rallied to $ 2.0379 and was testing the $2.04 level. However, analysts believed that the pound was not out of the woods yet as the credit woes were far from over.

The Sterling was traded at MUR 63.09 as against MUR 62.82 last week.

The Japanese yen was quite subdued over last week trading as many Japanese firms and portfolio managers were closing their books for the first half of the fiscal year this month. Despite Japan?s core consumer price index fell 0.1 percent in August from a year ago and Japan?s unemployment rate were on the rise, the yen gained as it got support from Japanese companies overseas repatriating their earnings at the end of the first half of the year.

The Japanese yen was traded at MUR. 26.80 as against MUR 27.20 last week

Vassan CALEEMOOTOO

HSBC Mauritius Treasury and Capital Markets