The dollar started the week on a strong footing due to expectations of accelerated inflationary pressures in the US. However, the momentum lost steam as the US currency got hammered by a pool of bearish data and fears of recessions.

Last week trading saw the dollar rallying despite minutes of the Federal Open Market Committee?s Jan 29-30 policy meeting showed that most officials saw the potential risks of growth pulling on the downside, from 1.8 % and 2.5 % to 1.3 % and 2 %. The rally was fuelled by expectations of inflationary pressures beyond forecast and belief that the Federal Reserve (Fed) would not be cutting rates as steeply as initially believed. Data showed that US core consumer price index, which strips out food and energy costs, rose 0.3 % in January, and its highest monthly rise since June 2006. This sent the euro tumbling to a session low of $1.4615. Dollar gains did not last long as the greenback nose-dived to a two-week low against the euro after data showed a surprising contraction in US regional factory activity. This spooked traders and stroke fears of an impending US recession. To add fuel to the fire, weekly jobless claims report pointed out that the labor market was starting to suffer the weight of the slowing economy and pushing traders to retract their bets on the dollar.

Interest futures had already price in a full 50-basis point rate cut at the Fed?s overnight borrowing rate at its next meeting from 3 % to 2.5 %. According to currency strategists, further rate cuts would have atrocious impact on the dollar?s appeal to investors, especially in times where other central banks in Europe, Australia, and in New Zealand were keeping rates steady or raising them. The euro bounced back against the greenback by mid-week and hit $1.4837, posting its biggest one-day advance against the greenback since Jan 28.

■ <B>The US dollar traded at MUR 28.19 yesterday as compared to 29.72 last week.</B>

The panic button had been pressed when news of the nationalization of Northern Rock hit the market. Immediately, sterling slid to as low as $1.9477. Investors feared that the public ownership of Northern Rock would raise more doubts about the health of the British Financial sector. Northern Rock had borrowed about 25 billion pounds from the Bank of England (BoE) since the global credit crisis last year wrecked its funding model, sparking the first run on deposits at a British bank for some 140 years. In addition, expectations grew that the BoE might not be too successful in putting UK?s economy back on tract with only a 25 basis points cut. Toward the end of the week, the pound got another blow when the arch-dove David Blanchflower called for an aggressive 50 basis points cut while analysts expected that all nine members of the Monetary Policy Committee would vote for a 25 basis point cut only. The pound was then seen hovering around the $1.9356 levels. However, the pound got a little boost toward the end of the week from a rise in British retail sales by 0.8 percent in January, recovering from a 0.2 percent fall in December.

■ <B> The Sterling was traded at MUR. 55.43 as compared to MUR 56.02 last week.</B>

The Japanese yen benefited from a fall in Asian stocks to firm at 107.20 against the US currency. In fact, the Nikkei share average was down 0.8 percent in the beginning of the week. However, stop-loss orders at 108.00 were triggered which helped the dollar to recover from a week lows. For next week, traders would be looking cautiously into fresh new data coming up to find clues about the future path of the Japanese currency.

■ <B> The Japanese yen was traded at MUR. 26.14 as compared to MUR 26.55 last week.</B>

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