Last week’s trading on the currency market saw the dollar strengthen further to a fresh two-month high at 1.2922 per euro before succumbing to profit-taking.

US economic data released last week, gave a further boost to the dollar’s rebound from its record low of 1.3670 per euro hit on 30 December last. Strong US core inflation and housing starts data confirmed the view that the pace of economic activity continued to pick up in most of the US in late November through early January, supporting the case for higher US interest rates. The market expects US Federal Reserve to hike official US interest rates by 25 basis points at its next meeting on 01-02 February followed possibly by two further quarter-percent hikes up to end of this year. With greater potential for rises in US interest rates compared to rates in the euro zone, market focus on interest rate differentials tends to benefit the dollar.

However, the dollar rebound succumbed to profit-taking, helped by softer-than-expected US consumer confidence data and a press report hinting that Federal Reserve Chairman Alan Greenspan was content with a strategy of small, slow rises in interest rates.

Against the Mauritian rupee, the euro was trading at MUR 37.75 on Monday as compared with MUR 37.63 a week earlier.

The Yen remained well bid ahead of the next G7 meeting scheduled for 04 and 05 February where exchange rate flexibility is expected to be a major topic of debate. Pressure seems to mount on China to revalue its currency, the Yuan, whose peg against the dollar is actually giving it a trade advantage. As China’s capital controls make speculative buying of the Chinese Yuan difficult, speculators have started buying the Japanese Yen as a proxy bet on the anticipated rise in the Chinese Yuan. A revaluation of the Chinese Yuan would drag other Asian currencies higher against the dollar. On Monday, the Japanese currency was offered at MUR 28.22 as compared to previous Monday’s 28.16.Sterling was supported at the beginning of last week by strong UK inflation data. However, unexpectedly weak retail sales figures on Friday dampened the market’s enthusiasm. It had regained some ground on Monday as the market was awaiting the release (expected today) of minutes of the last Bank of England Monetary Policy Committee together with the preliminary reading of GDP growth.

On Monday, the pound was trading at MUR 54.26 as against MUR 53.70 a week earlier.

Major data/events this week:

■ Wednesday 26 Jan US mortgage and manufacturing, German IFO, UK GDP, Japan retail sales

■Thursday 27 Jan

US durable goods and manufacturing, UK CBI, German CPI, Japan CPI and unemployment

■Friday 28 Jan

US GDP, employment and inflation, French PPI, unemployment and industrial survey

■ Monday 31 Jan

US personal income, consumption, inflation, NAPM and housing, EU sentiment survey

<B>Contribution by HSBC</B>