Last week trading on the currency market saw the dollar rise to a near seven month high against the European single currency as optimism over US growth prospects contrasted with the political uncertainty hanging over the sluggish euro zone economy. Despite a string of negative economic reports, investors’ belief about the optimistic long-term outlook for the greenback triggered a technical breakout. The dollar’s break through technical resistance levels helped to buffer the US currency from a surprisingly weak report on regional US business, as well as soft employment numbers, prices paid and new orders components.

Taken together the data suggested the pace of US interest rate hikes would be measured but not aggressive. Most market players are now expecting the US Federal Reserve to continue its tightening campaign, though at a measured pace, which would widen the dollar’s interest rate advantage over the common currency. Since last June, US interest rate has known eight straight interest rate rises, whilst euro zone interest rate has stayed unchanged at 2 per cent.

<B>Positive sentiment supporting the dollar</B>

The prospect of higher US interest rate has so far helped outweigh worries about rising trade and budget deficits, leading the dollar to rebound. Contrasting with the positive sentiment supporting the dollar, the Euro was beset by fresh uncertainty, as German Chancellor Gerhard Schroeder called for early national elections just days before France’s referendum on the European constitution.

Against the Mauritian rupee, the euro was trading at MUR 37.02 as compared to 37.15 MUR last week. Over the week, the dollar steadied close to a one-month high against the Japanese currency, consolidating gains made on an increasingly upbeat view of the US economy. Moreover, speculation that China could revalue its currency soon has not so far proved to be a strong enough factor to boost the yen given the bullish sentiment for the dollar. Yesterday, the Japanese currency was offered at MUR 27.45 as compared to previous Tuesday’s 27.57.

The sterling fell to a 6-1/2 month low against the dollar as the greenback rallied across the board on expectations that US interest rates are set to rise further. The recent run of strong US data reinforced the view the Federal Reserve would raise US interest rates steadily. By contrast, investors are pricing in the possibility of a British interest rate cut following weak economic data. The Bank of England raised interest rates five times between November 2003 and August 2004.Yesterday, the pound was trading at MUR 53.85 as against MUR 54.04 last Tuesday.

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

<B> Wednesday 25 May </B> German Ifo, UK GDP, US Durable Goods

<B>Thursday 26 May </B> US GDP, US Jobless Claims

<B>Friday 27 May</B> US Consumption

<B>Monday 30 May</B>

<B>Tuesday 31 May </B> Eurozone Consumer Sentiment, US Consumer Confidence, US Chicago PMI

<I>Contribution by HSBC</I>