The dollar started its decent to the depth of a 15-year lows as signs of slowing US economic growth and fears of recessions resurfaced. Speculations grew that the Federal Reserve (Fed) might have to cut down interest rates to save itself from the pitfalls of economic recessions and low economic growth. On the other hand, both Europe and the UK were showing signs of strengths and were planning to hike borrowing costs some more.

Last week, a slew of ugly US economic data stroked concerns and sapped investors? risk appetite for the greenback. Data released showed pending US home sales in July fell to its lowest level since June, causing US stock to go lower.

According to analysts, the housing market was in a big mess and there were no light thru the tunnel in sight. Separate reports indicated that private-sector job growth in August eased and a surge in layoffs by US companies also prompted traders to bet that the Fed could even go up to a 50 basis point cut on September 18th.

Many considered that 25 basis points cut was nearly a sure thing but the financial market turbulences were too severe, as defaults on risky subprime mortgages had increased drastically. The Fed had reacted by flooding the market with $31.25 billion in three different operations designed to increase liquidity. The European Central Bank, on the other hand, injected 42.25 billion euro on a ?prevention is better than cure? basis.

The greenback, totally vulnerable, nose-dived when US payroll data showed that employment contracted by 4,000 since August 2003. Spooked traders dumped the dollar, as they started to realise that consumption would decrease as consumers? fear of an impending recession set in.

The future US currency looked very gloomy and an interest rate cut would send it to the gallows. The US dollar traded at MUR 31.570 yesterday compared to MUR 31.772 last week.

Sterling rose as fears of a rate cut in the US ignited a flight from the greenback to higher yield currencies. In sharp contrast to the US, the United Kingdom showed solid house prices gains and above consensus forecast in service sector for the month of August. According to HBOS plc annual 3-month rate, house price inflation edged up to 11.4 percent. This made analyst believed that the pound turn around was more than just plain dollar weakness and credit crunch in the US.

In fact, data released last week, showed that the UK was coping well with the global market turmoil and economic growth might rise at a faster rate than previously thought in the last quarter. The pound fell momentarily when the Bank of England left interest rates unchanged but ditched tradition by issuing a statement.

However, the BoE stated that it was too early to find out how much UK?s companies and consumers would suffer due to the recent financial market shake up and would not intervene to revamp the economy. The pound ended up the week with a gain as the expectation was increasing for a rate cut in the US.The Sterling was traded at MUR. 64.02 as against MUR 64.16 last week

According to data released by the by the Japanese government, the Japanese economy shrunk by 0.3 percent in April-June from the previous quarter against an initial estimate of 0.1 percent growth.

This weak economic growth data fuelled speculation that the Bank of Japan would not be hiking up rates at its September 18-19 policy meeting. However, the market shrugged off those dovish Japanese data and concentrated on the health of the US economy. The yen was sold at MUR 27.79 as compared to MUR 27.42 last week.

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

<B>Wednesday 12 Sep: </B> US Mortgage index

<B>Thursday 13 Sep: </B> US Jobless claims, Fed Budget

<B>Monday 17 Sep: </B> GB PPI

<B>Tuesday 18 Sept : </B> US redbook

<B>Vassan Caleemootoo HSBC Mauritius Treasury and Capital Markets</B>