The poor dollar got smacked down thru out most part of last week sessions. Soaring oil prices, dovish manufacturing, weak job growth data and expectation of Federal Reserve interest rate cuts, caused the US currency to tumble to its lowest level since April 2003.

Prices of crude oil shot to USD 100 a barrel causing spooked investors to close risky trades, especially those that were funded by borrowing yen. This accelerated the dollar fall descent to fresh lows. The Institute of Supply Management reported a fall in the US factory activity index to 47.7 for the month of December, pilling more pressure on the US currency. Traders rushed to sell the greenback as the fall of US factory activity index reflected a contraction in the sector and a potential move towards US recessions. US manufacturing data, which in the past were quite resilient, gave hints that the US economy might be overweighing on global demand to boost US manufacturing sector. Besides, the manufacturing report also pointed out that price components for December rose despite a decline in headline numbers, suggesting that stagflation, a negative combination of higher inflation and low economic growth, might be cropping up.

As if the manufacturing data were not bad enough, weak job growth data put another nail into the greenback?s coffin. Jobless rate rose to 5 percent, the highest since November 2005 and this implied that the spectre of recession was lucking in the dark making the likelihood of an aggressive rate cut by the FED quite high. Consequently, the dollar lost 1.2 percent in the first three days of the year, its worst yearly opening since 2006. Furthermore, interest rate futures were reflecting more than two third chances that the FED would drop overnight borrowing rate by 50 basis points. On the other hand, the European Central Bank (ECB) seemed more concerned about inflationary pressures in the euro zone and would probably leave interest rate unchanged at four percent at its next policy meeting.

The US dollar traded at MUR 28.77 yesterday compared to MUR 28.87 last week.

Sterling nose-dived during last week trading, on a trade-weighted basis, as investors were expecting a fall in the UK?s interest rate in the near future. The fall of the pound against the dollar had been relatively steady, since the unanimous vote from the Bank of England?s (BoE) officials to cut rates to 5.5 percent in December. According to analysts, interest rates in the UK were set to fall further in the near future causing a cyclical divergence to set in between the future path of UK?s interest rates and that of the euro, which was set to rise. In other words, the UK?s pound was seen to decouple with the euro to couple with the dollar in this interest rate cycle. Towards the end of the week, the pound continued to get hammered when the British manufacturing activity index fell to 52.9 in December against forecast of 53.6. The Sterling was traded at MUR. 56.71 as against MUR 57.24 last week. The yen dipped against the dollar, as investors were disappointed that the weak US payrolls report did not spark any big retreat in the US currency. In addition, Asian stock markets extended their losses on concerns about the US economic outlook. On the other hand, Japanese importers started to buy dollars and sell yen to fund their commodity needs.

The Japanese yen was traded at MUR. 26.32 as against MUR 26.33 last week.

<B>Vassan Caleemootoo

HSBC Mauritius Treasury and Capital Markets</B>