The greenback clawed back onto the international stage after being plagued by prolonged periods of poor sentiments. The US currency got knocked down for the past few months as speculations were running wild that the Federal Reserve would be cutting rates in the US while other central banks in Europe, in UK, and in Japan were thinking of pushing interest rates up.

As signs of recovery in the US economy continued to dominate the scene and the specter of an interest rate cut was pushed back into the closet, investors resumed their bets on the dollar. US treasury bond yield and T-bills vaulted to a five-year high and inflationary pressures re-surfaced. Besides, the US retail sales growth in May shot to its highest level since January 2006, lifting economists? growth forecasts and sparked concerns about inflation. Some US investment institutions revised upwards their views to 4 percent annualized growth rate for the US economy ? a sharp rebound from the sluggish first quarter. Markets mirrored the soaring growth expectations, causing traders to close out their short positions; hence, propelling bond yields and the greenback in their wake.

For the past week, bond market had started pricing a FED interest rate hike for next year boosting the allure of US denominated assets causing the spread between the implied US interest rate in December 2008 and the euro to widened to 70 basis points from 43 basis points at the end of April.

Towards the end of week, the dollar rally got capped against the euro as reports for May showed that core consumer prices, which excluded food and energy, climbed at its slowest pace since March 2006 and that factory output slowed while consumer confidence dropped. The euro managed to reposition itself but many analysts were still skeptical about the European currency?s strength especially when data showed that US current account deficit widened in the first quarter by less than what analysts expected. In fact, US current account deficit widened to $192.58 billion from $187.94 billion in the forth quarter. In addition, the deficit for full-year 2006 was revised down by $45 billion to $811.48 billion. Against the Mauritian rupee, the dollar was trading at MUR 32.045 yesterday as compared to MUR 31.994 a week earlier.

The yen continued to get hammered by investors? appetite for carry trades. Any timid attempt by the yen to advance against the dollar was neutralized by flows related to Japanese households? investing overseas in investment trusts denominated in foreign currencies. Market players had been focusing on the Bank of Japan?s meeting to find clues on the future path of the Japanese currency. In a news conference, the BoJ Governor Toshihiko Fukui, calmed down traders? fears about selling the yen in carry trades. In fact, Fukui commented that the Japanese central bank would raise rates only gradually. Against the Mauritian rupee, the yen was trading at MUR 25.92 as compared to 26.30 same as a week earlier.

The fashionable currency knew ups and down during last week trading. It started the week on a firm footing bolstered by comments from the Bank of England Governor Mervyn King. The latter stated that interest rates in the UK would continue to climb if indicators of capacity pressures, pricing intentions and inflation expectations would remain bullish. Besides, UK?s interest rates futures expected the BoE to raise rates to 6 percent from the current 5.5 percent before the year end. Towards the end of the week, the pound lost grip as a string of dovish data gave indications that price pressures might be easing.

British retail sales rose by 0.4 percent in May, but retail sales deflator slowed from April?s eight-year high. In addition, pay growth eased to 3.0 percent in the three months to May from an upwardly revised 3.1 percent in the period to April. Against the Mauritian rupee, the Sterling was trading at MUR 63.14 yesterday as compared to MUR 63.47 a week earlier.

<B>Vassan CALEEMOOTOO</B> Contibuted by HSBC

Major data/events this week:

■ Wednesday 20 June US Mortgage indx, JP Trade Balance

■ Thursday 21 June US Jobless Claims Phil Fed Bus

■ Friday 22 June

■ Monday 15 June

■ Tuesday 26 June US Redbook