The dollar rallied to six-month highs against the euro supported by a batch of robust US consumer confidence data and prospects of a euro zone interest rate cuts as investors braced for recession in the region.

A barrage of dovish euro zone data suggested that the euro zone might be on the verge of a recession and that the European Central Bank might be faced with the option of cutting interest rates. The Ifo German business climate index in August fell more than expected to a three year low. German gross domestic product contracted in the second quarter for the first time since 2004, while German consumer sentiment nose-dived to a five-year low. The euro started it retreat and fell to $1.4642. Toward mid-week the euro did manage to stick its head above water when ECB Executive Board member Axel Weber commented that any talk about lower interest rates was premature. Many analysts were concerned about a possible dollar pullback with momentum indicators for the euro diverging. However, nothing could stay in the path of the crushing dollar for long. A rally in US stocks led by industrial and financial companies and a decline in oil prices gave immense support to the greenback. In addition, gross domestic product grew at a 3.3 percent annual rate in the second quarter as compared to economists? forecast of 1.9 percent. Consumer confidence for August rose while newly constructed family homes increased for the month of July. Dollar bulls rushed and bid aggressively for the greenback pressuring the euro to surrender to a six-month low. The dollar index was up 0.1 percent at 77.1311 within sight of its 2008 high of 77.619.

>The US dollar traded at MUR 29.01 as compared to MUR 28.76 as last week.

Sterling was a falling knife that nobody wanted to catch. The UK?s currency fell to a two-year low against the dollar yesterday after a weak reading of German business confidence bolstered the view that the UK was in trouble waters. The euro zone continued to be UK?s biggest trading partner and export market and the weak German data spelled bad news for the pound. Traders remained Sterling bears especially with the expectation that the Bank of England might cut interest rates in the near future. This could push the pound to as low as $1.70. In addition, weak UK house price and retail sales data did nothing to help the cause of the pound. British house prices fell of 1.9 percent in August, posting their biggest drop since 1991. In the Guardian newspaper, the Chancellor of the Exchequer Alistair Darling stated that Britain?s economic downturn might turn out to be the worst in 60 years.

>The Sterling was traded at MUR. 51.91 When compared to MUR 53.09 last week.

The Japanese yen had a muted reaction to surprise resignation of Japan?s Prime Minister Yasuo Fukuda, the second head to step down in less than a year.

>The Yen was traded at MUR. 26.74 When compared to MUR 26.20 last week.

Major data/events this week:

Wednesday 03 Sept: US Mortgage index

			     EZ GDP

Thursday 04 Sept:      US Jobless Claims, 

			      EZ ECB rate

			       GB BoE rate

Friday 05 Sept: 	

Monday 08 Sept:	

Tuesday 09 Sept: 	       US Redbook

Vassan Caleemootoo

HSBC Mauritius Treasury and Capital Markets