The US dollar went thru a roller coaster ride last week as financial news and data hit the market like storms. Deep concerns about the health of the US economy prevailed, pressuring investors to adopt safe strategies in view of reducing their exposures in risky assets.

The greenback started the week on a weak footing as it got blown away by the bigger-than-expected quarterly loss at Fannie Mae. The latter which is the largest provider of US home financing, posted a $2.19 billion loss. Investors were more likely to believe that the financial market turmoil had a long way to be over yet. According to analysts, the US troubled US housing sector might lead to more job losses and slower consumer spending, causing the Federal Reserve to cut interest rates again. These worries caused the euro to rebound to $1.5525. The European common currency later got support from euro service sector data that were stronger than expected. In addition, record high oil prices were seen as reinforcements for the European Central Bank?s focus which would not deviate from inflationary pressures. In a speech last week, Jean-Claude Trichet, ECB? president, stuck by his hawkish statement pointing out that inflation represented ?significant? risk and decided to keep interest rates in the euro zone unchanged at 4 percent.

The US currency, however, got a breather when US productivity added to gains booked after the Federal Reserve officials stated that the easing monetary policy was coming to an end and that inflationary pressures were building up. In a speech in Denver, Kansas President Thomas Hoening stated that the FED would be ready to hike rates in a timely manner so as to ward off "troublesome" inflation and gave clues that he might not be ready to go for another rate cut. Although Hoening did not form part of the voting committee, analysts believed that his position was making headway in times of rising oil and food prices. Consequently, the euro lost ground to $1.5367 before stabilizing at $1.5403.

In addition, a decline in euro zone retail sales weighted heavily on the European common currency and market players were speculating that the European Central bank might have to cut interest rate before year end.

The US dollar traded at MUR 27.50 as compared to MUR 26.932 as last week.

Tough times for the Sterling continued as a batch dovish data kept piling up. A report released last week, showed that UK?s service sectors stagnated in April increasing concerns that the credit crunch was biting into UK?s economic growth and giving clues that interest rates in the UK might drop in the near term. Besides, the Chartered Institute for Purchasing and Supply index fell to 50.4 in April, signaling meager growth. On the other hand, financial markets attached a 40 percent chance that the Bank of England might be cutting interest rates by 25 basis points at its next policy meeting.

The Sterling was traded at MUR. 53.702.94 when compared to MUR 52.94 last week.

The Japanese yen firmed at approximately 104.81 against the US dollar, slipping from earlier highs. As stocks rose, the low-yielding yen was used as a cheap source of funds to buy higher-yielding currencies in carry trade. Furthermore, the Bank of Japan had kept interest in Japan very low to encourage the swapping of yen into other high-yielding currencies. However, Japanese exporters were more eager to sell the dollar as part of their regular repatriation of overseas earnings; hence, capping the Japanese yen fall. The Japanese yen was traded at MUR. 26.47 When compared to MUR 26.06 last week.

Vassan Caleemootoo

Hsbc Mauritius Treasury and Capital Markets