Burst liquidity bubble? collapse of securitization?dovish sentiments for the financial system? feeble housing markets were but symptoms of an impending recession in the US. Analysts believed that the greenback would be unlikely to recover in the near future even with steeper interest rate cut from the US Federal Reserve.

Gloomy US outlook had spooked up investors who were more than ready to dump the greenback in anticipation of another raft of bad economic news. This caused the euro to vault to a lifetime peak of $1.5275. However, traders cut down their short dollar positions as US manufacturing and the Institute for Supply Management?s index came out better than economists? forecast. In fact, the ISM index contracted to 48.3 as opposed to economists? forecast of 48.0.This was taken as a relief by traders who went ahead and close down short dollar positions. As expected dollar recovery was quite temporary as short-term interest rate futures showed about a 75 percent perceived chance of the FED lowering its benchmark overnight rate by 75 basis points at its March 18 meeting.

Towards mid-week the US currency resumed its slide against the Euro amid growing pessimism about the US economy. Demand for the currency fell further after data showed that the country?s service sector contracted for a second straight month in February. In addition, US Treasury Secretary Henry Paulson stated that the US upswing would likely come to a halt, adding to a mountain of fears to investors. The comments from Paulson poured fuel onto the fire and the dollar nose-dived to a historic peak of $1.5300 against the euro. The dollar index, which tracts the greenback?s performance against a basket of currencies dipped to record troughs at 73.37.

On the other hand, the European Central Bank maintained its hawkish inflation rhetoric despite criticisms that the euro was overvalued against some currencies. So far the ECB had downplayed any prospects for a rate cut in the euro zone and had remained muted on the single currency?s sharp rally.

The US dollar traded at MUR 27.41 yesterday as compared to 27.05 last week. The dollar and higher-yielding currencies dipped against the yen, dragged down by profit-taking as well as selling by overseas funds and Japanese exporters. The dollar fell 0.1 percent to 103.91 but held above a three-year low of 102.60 yen on the electronic platform. The yen upward move did not slow even though Tokyo share prices rose around 2 percent and other Asian stock markets rallied.

The Japanese yen was traded at MUR. 26.97 as compared to MUR 27.00 last week.

The pound rose against the dollar as the latter succumbed to historic lows. However, the economic fundamentals were still looking very weak for the UK?s economy. British consumer confidence fell to its worst level since comparable records began four years ago. Sentiment at British services firms reached its lowest point in 15 months according to a CBI survey. In addition, permanent job appointments in Britain fell for the first time in nearly five years last month. According to analysts, negative sentiment on the UK economy would persist and the markets were pricing three cuts in interest rates before the end of the year. The Sterling was traded at MUR. 55.01 as compared to MUR 55.34 last week.

Vassan CALEEMOOTOO

HSBC Mauritius Treasury and Capital Markets