The main feature of last week’s trading on the currency market was China’s announcement that it had abandoned its dollar peg in favour of a basket of currencies to manage the Chinese yuan. After months of international pressure, China finally gave in by revaluing its currency against the dollar to 8.11 yuan. The initial revaluation of the yuan last Thursday was a surprisingly small 2.1 percent.

However, there were still some unclear issues hovering over the fate of the yuan. The composition of the basket China would use to replace the dollar peg was unclear, along with Beijing’s plans for any future moves and any follow-up from other Asian countries. On paper, China could allow the yuan to move only by a maximum of 0.3 percent each day against the dollar compared with the prior day’s close.

In the aftermath of the news of China’s decision to revalue the yuan, the Japanese yen shot up against the greenback in its biggest one-day rise against the dollar in more than three years. The dollar was down 2.2 percent against the yen to 110.34 yen, after falling as low as 109.89. Before China’s announcement, the dollar was trading at around 112.40 yen. A stronger yuan against the dollar would make Japanese monetary authorities more comfortable with a higher yen, as both countries are competitors in global trade.

Knee-jerk reaction

The yen was further boosted by news that Malaysia had changed the ringgit peg to a managed float, fueling further gains in the Japanese currency. However, the yen retraced some of its initial surge prompted by the yuan news, as on second thought market players suspected the yen gains were overdone.

Investors also grew slightly nervous about the possibility of intervention after Asian authorities repeatedly warned they would take action if needed.Yesterday, the Japanese currency was offered at MUR 26.82 as compared to previous Tuesday’s 26.71.

Against the European single currency, the dollar regained some of the previous sessions’ losses in the wake of the news of China’s move to drop the yuan’s peg against the dollar. The euro came off highs against the dollar to trade at $ 1.2050. The initial knee-jerk reaction was a little too exaggerated.

Against the Mauritian rupee, the euro was trading at MUR 36.01 as compared to 35.94 MUR last week.

Sterling held firm against the dollar, keeping some of its earlier gains made after China scrapped the yuan’s peg to the dollar, and after release of data showed soaring UK retail sales. The UK retail data appeared to cloud the prospects for interest rate cuts in Britain although it did not change expectations of an interest rate cut in August. The pound gave back some of its gains on security concerns after four bombs exploded on last Thursday on the London’s transport system. These explosions came just two weeks after bomb attacks on underground trains and a bus.

Yesterday, the pound was trading at MUR 52.09, unchanged from last Tuesday’s exchange rate.

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

■ <B>Wednesday 27 July</B> US durable goods,

■ <B>Thursday 28 July </B> US Jobless Claims

■ <B>Friday 29 July</B> Euro zone consumer & industrial sentiment, Euro zone Business climate, US GDP, US NAPM, US Chicago PMI,

■ <B> Monday 01 Aug </B> US ISM Manufacturing, K PPI

■ <B>Tuesday 02 Aug </B> Euro zone PPI, US Redbook

<B>Contribution by HSBC</B>