Troubles for the US currency kept coming since the Federal Reserve started on an interest rate-slashing spree. In fact, the Fed unexpectedly cut rates by three quarter percentage points at an extraordinary meeting before cutting rates again by 50 basis points at its monthly policy meeting.

Dollar?s interest rate had already lost its burnishing allure and had fallen among the lowest in the developed world. Many investors were finding it quite attractive to borrow USD to finance the purchase of other high yielding currencies. This poured additional woes on the greenback, which fell 0.7 percent against the euro at the start of the week. According to analysts, the dollar has become a financing currency in the likes of the Japanese yen and the Swiss franc.

The US currency got a breather after mix US economic data prompted traders to trim bets against the greenback. Even news of more issues with the US housing sector did not pile pressures on the dollar. In fact, the market digested the US housing problems easily and turned its focus onto other key economic indicators with the hope that the US economy would be back on foot. A reading of the Institute of Supply Management report stated that manufacturing index for January expanded more than what economists had forecast. Such data reinforced the expectation that that there might be some light at the end of the tunnel after all and that the US economy was not falling into recession. Later in the trading week, the US currency was seen clawing some gains against the European currency and was traded at $1.4796; a half a percent increase from $1.4952 the day before. Despite the dollar persistent weaknesses, the European common currency failed to hit the psychological barrier of $ 1.50 and managed to test only the $1.4966.

However, with the constant erosion of the interest rate yield of the US dollar, the third lowest among major economies, the appeal of holding dollar-denominator assets had been greatly reduced. As a comparison, the two-year euro-zone bond over the between two-year Treasury note widened to 135 basis points, a fall of 40 basis points in January alone.

● <B>The US dollar traded at MUR 29.13 yesterday compared to MUR 29.23 last week.</B>

The pound knew ups and down against a dovish dollar due to a swirling mix of UK and international economic influences. Market players were expecting a fall in the UK?s interest rates to help prop up the slowing British economy. In an interview, Blanchflower, one of the nine voters on the Central Bank Monetary Policy committee, stated that the current interest rates of 5.5 percent were ?restrictive? and reiterated the concern about the problems in the US economy and its deep impacts on the British financial system. In addition, interest rate futures were fully pricing in a 25 basis point interest rate cut in the UK at the Bank of England?s next week?s policy meeting. However, the pound got some stimulus toward the end of the week as the US dollar succumbed across the board.

● <B>The Sterling was traded at MUR. 57.45 as against MUR 58.01 last week</B>

At the start of the trading week, the Japanese yen rose broadly recovering from early losses as higher Asian stocks did little to quell the fears of a US recession and prompted investors to dump risky positions in high-yielding currencies in favor of the low-risk, low return yen. In addition, traders noted that the yen got a formidable boost from Japanese investors repatriating funds of approximately EUR 45 billion into Japan from maturing euro zone government bonds.

● <B>The Japanese yen was traded at MUR. 27.29 as against MUR 27.42 last week</B>

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

Wednesday 6 Feb: US Mortgage index, CPI

Thursday 7 Feb: US Jobless GB BoE rate EZ ECB rate

Friday 8 Feb:

Monday 11 Feb: GB Trade

Tuesday 12 Feb: US Redbook

<B>HSBC Mauritius Treasury and Capital Markets Vassan Caleemootoo</B>