Last week trading on the currency market saw the dollar recover against the European single currency, after the common currency failed to sustain a break above key technical resistance around $ 1.2450, that inspired market players to load up on the US currency.

The dollar recovered from the knee-jerk selling in light of Katrina’s devastation and potentially dovish impact on US interest rates. Ongoing debate about the impact of hurricane Katrina on the US economy and whether the Federal Reserve policy committee would raise US interest rates for the 11th consecutive time at its next meeting on Sept 20 had earlier kept the dollar under some pressure.

Many investors initially thought that the Federal Reserve might refrain from raising US short-term interest rates to assess Katrina’s effects. But a chorus of Fed officials’ comments fueled speculation in the past days that the US Central bank would raise US interest rates at the next meeting, after 10 straight hikes since June 2004. Furthermore, responding to a question on the Congressional Budget Officers’ forecast that Katrina would cut near-term gross domestic product (GDP) growth by 1 percentage point, US Treasury Secretary John Snow believed that estimate was too high.

<B>Effects of Katrina</B>

Realistic estimate would be more in line with a half-percent hurt to US GDP growth in the third quarter and fourth quarter, but with a pick-up of roughly that order for 2006. US Treasury Secretary John Snow also added that the effects of Katrina would probably be temporary, with a somewhat slower growth and probably higher inflation rates.

Against the Mauritian rupee, the euro was trading at MUR 37.12 as compared to MUR 37.62 last week. Over the week, the dollar held its ground against the Japanese currency despite the landslide election victory for Prime Minister Junichiro Koizumi. The yen got an initial boost after the surprising results of the Japanese elections.

Analysts had expected Koizumi to win, but the surprisingly big margin had prompted market players to snap up the yen on hopes his victory would clear the way for reforms such as privatising the vast postal system. However, the impact from the election’s outcome was short-lived. Dollar regained ground on the back of growing expectations for a US interest rate rise at the next Federal Reserve meeting.

Yesterday, the Japanese currency was offered at MUR 27.45 as compared to previous Tuesday’s 27.62.

Sterling slid against the dollar after data showed Britain’s goods trade gap with the rest of the world widened to 5.076 billion pounds from 4.167 billion in June, more than the 4.7 billion forecast. But the data had little lasting impact as the market shifted focus towards this week’s key UK data, which would give clues on whether the Bank of England will cut UK interest rates again. Last Thursday the Bank of England left its monetary policy unchanged after cutting interest rates for the first time in two years in August.Yesterday, the pound was trading at MUR 54.90 as compared to previous Tuesday’s 55.35.

<B>Major events/data this week:</B>

● <B>Wednesday 14 Sept: </B> UK unemployment, US Retail Sales, US Industrial Production

● <B>Thursday 15 Sept: </B> UK Retail Sales, US CPI, US Jobless Claims, US Retails Earnings

● <B>Friday 16 Sept:</B> Euro zone industrial production, US Michigan

● <B>Monday 19 Sept</B>

● <B>Tuesday 20 Sept:</B> US Federal rate decision, US Redbook

<B>Contribution by HSBC</B>