To err on the side of ‘’going a little to far’’ was safer in preventing inflation in flaring up stated Federal Reserve Chairman, Ben Bernanke last week. William Poole, St Louis Federal Reserve President, put the icing on the cake when he echoed Bernanke’s comments that a slowndown in the economy in its own might not reduce inflationary pressures.

These comments sparked a bounce in the greenback. The market was betting that the Fed was more concerned about combating inflation than that of an economic slowdown. According to analysts, core prices were running near its comfort zone despite softening energy prices. The dollar crept higher and only a hike by 50 basis points in the eurozone interest rates by the European Central Bank could make the dollar tumbled past $1.30 against the euro. However, The ECB dashed expectation of a half- percent hike by opting for a quarter point instead. In addition, Jean-Claude Trichet gave no clues as to the pace of monetary tightening in the euro zone; hence, propelling the dollar to new heights against the euro.

Aggressive rate increases from Turkey, South Korea, India, and South Africa and a stream of hawkish talks on inflation, took the market off guard. Sharp declines in stocks, oil, and emerging markets assets spooked investors who took profit and parked their cash in dollars and safe-haven assets like the US Treasuries. Capital preservation at the expense of chasing returns became the driving theme lately. With many central banks hiking up the rates, the rug had been pulled out under the commodity boom favoring a retrenchment that buoyed the greenback. The dollar exited the New York trading session last week after posting its best weekly gains in over a year against a basket of major currencies.

<B>The US dollar traded at MUR 30.99 yesterday </B>

The Sterling managed to keep afloat by pulling a few tricks out of its bag this past week. The Bank of England’s decision to keep the UK’s interest rates unchanged at 4.50 percent left market players hungry again and in search of more return. After the ECB hiked up the rates in the eurozone, investors’ focus shifted away from the pound to other currencies. Besides, tepid data put the Sterling under additional pressures. UK house prices rose by a modest 0.1 percent in May, the lowest monthly rise since January. Manufacturing output fell by 0.2 percent in April, the weakest reading since October. Sterling woes did not end, as UK’s Trade data showed that UK’s deficit widened to 5.75 billion in April compared to 5.455 billion in March.

The pound got a breather towards the end of the week on positive Merger & Acquisition flows. British airport operator BAA stated that it had accepted a £19 billion takeover bids from a consortium led by Spain’s Grupo Ferrovial. Furthermore, Novartis AG said that it had agreed to buy British firm NeuTech Pharma PLC, a specialist in fighting hospital superbugs, for £569 million.

The Sterling was traded at MUR.57.39 as against MUR 58.29 last week.

The Japanese yen slid against the dollar on mounting expectations that the US interest rates would rise again this month and on profit taking by investors. Japanese share prices slumped throughout last week dampening that the bank of Japan would raise interest rates this month. According to analysts, the market was driven by stock prices and interest rate outlook. If the Bank of Japan kept delaying its actions to raise interest rates, the yen could slip further. Towards the end of the week, the yen took another hit when growth data gave another clue that the BoJ would be less likely to bump up interest rates this month. The yen was sold at MUR 27.34 as compared to MUR 27.83 last week.

Major data-events this week :</B>