The dollar started the week drifting cautiously higher against the euro as traders consolidating their positions waited for economic reports to come out to find fresh clues on euro and US interest rates. The dollar had already been bruised amid growing speculations that the Federal Reserve might be seen coming near to term with the interest rate hikes.

The greenback hovered immediately higher against the euro, as the US November trade deficit narrowed to $ 64.2 billion as compared to $ 68.1 billion in October. Market analysts already spotted that the ability of the US dollar to rally on stronger –than-expected figures showed that dollar bulls had not given up yet. However, the dollar edged lower when the minutes from the Federal government policy meeting in December fuelled market talks that the US tightening policy might be coming to an end. In the meanwhile, Jean Claude Trichet, European Central Bank’s chief, took a hawkish stance by stating that the monetary policy in Europe remained accommodative and that threats to price stability in the medium to long term had not vanished. Immediately traders started buying the euro until they realized that Jean-Claude Trichet had left the word “vigilant’’ out of his speech.

Currency traders comprehended that the mention of the word “vigilant” in the previous ECB comments was a direct response to inflationary pressures and that the ECB would be ready to raise interest rates in the euro zone if needed. Consequently, traders reacted by getting rid of long euro positions.

Despite dollar sentiment being broadly negative and that many traders were expecting some corrective measures was seen as imminent, interest rate differentials still put the gloss on the US currency. The market was expecting dollar gains to continue this week as more dealers were back to the dealing room after the national holiday in the US.

Volumes would pick up and investors would possibly garner more clues from a host of key US data that were scheduled to be published this week. Against the Mauritian rupee, the dollar was trading at MUR 30.798, same as a week earlier.

The Sterling took a knock during the trading sessions of last week as the United Kingdom posted a record trade deficit for the month of November. The Office for National Statistics showed that the trade gap widened to a record 5.966 billion pounds in the month of November.

<B>Rise and fall of the yen</B>

In addition, trading with other non-European countries showed a deficit of 3.019 billion pounds. The pound trimmed some of its losses, as Bank of England kept UK’s interest rate unchanged at 4.5 percent. In addition, a survey released by the National Institute of Economic and Social Research indicated that UK’s economy grew by 0.5 percent in the last quarter of last year.

Again the Sterling slid following a batch of mixed data that did nothing but confused the market. According to analysts, the Pound would be trading modestly for the rest of the week until more data shed more light on the British interest rate outlook.

Against the Mauritian rupee, the Sterling was trading at MUR 54.62 yesterday as compared with MUR 54.56 a week earlier.

The yen started the week bolstered by dollar woes but later relinquished some of its gains. The yen was propelled to 113.80 region and the market calculated that a break below 113.80 yen could set off stop-loss orders seen hovering around 113.70-113.50, possibly boosting the dollar into the 112 levels. However, the yen scaled back its rally and fell back to the 115.80 level late yesterday. Apparently, Japanese savers kept buying foreign denominated bonds and pressured the yen further. Against the Mauritian rupee, the yen was trading at MUR 26.96 as compared with MUR 27.02 a week earlier.

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

● <B>Wednesday 18 Jan </B>– US Mortgage Indx, EZ Ind Prod

● <B> Thursday 19 Jan</B> – US CPI, Redbook, CAP Net Flows, Jobless claims

● <B>Friday 20 Jan</B> – US Michigan Prelim, JP BoE report

● <B> Tuesday 24 Jan</B> – US Redbook

<B>Vassan Caleemootoo Contributed by HSBC</B>