Last week trading on the currency market saw the dollar weakening broadly against the major currencies. The dollar struggled near a four-month low against the European single currency, trading near US$1.2426 per euro.

The greenback was weighed down by diminishing interest rate hike expectations and by security concerns in the United States. Mixed US economic data, disappointing corporate results, and the Federal Reserve’s insistence on a measured pace of future tightening have convinced market players that they have been too aggressive on US interest rate hike prospects. The market had been discounting more aggressive Fed moves than in previous hiking cycles.

Therefore, all the good news from an interest rate perspective had already been priced in, and the dollar was left vulnerable as investors scaled back expectations of future interest rate hikes. The dollar also slipped on the back of security concerns. Security fears weighed on investment inflows to the United States, and exacerbated the current account problem. The US needs US$1-$1.5 billion a day to cover the outflow of money due to current account deficit, and weak corporate performance means less investment flows into the stock market.

Against the Mauritian rupee, the euro was trading at MUR 35.26 as compared with MUR 34.99 a week earlier.

<B>Uncertainty out of the way</B>

Over the week, the Japanese currency rose to a two-week high against the dollar, as investors expected economic reforms to survive the poor election showing by Japan’s ruling Liberal Democratic Party (LDP). The LDP won 49 of 121 seats at stake in Sunday’s upper house poll, but still kept the majority. With the element of uncertainty out of the way, attention should now turn to economic events.

Yesterday, the Japanese currency was offered at MUR 26.31 as compared to MUR 26.01 on the previous Tuesday.

Sterling hovered just below a three-month peak against the dollar, as the greenback was pressured across the board from structural and security concerns. However, the British currency was muted after the Bank of England left UK interest rates unchanged on last Thursday. Market nevertheless is expecting interest rates to hike in August, as economic data continues to show strength in the British economy. Prospects of further tightening should be supportive for the pound.

Yesterday, the pound was trading at MUR 53.01as against MUR 52.15 last Tuesday.

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

–Wednesday 14 July US Retail Sales

– Thursday 15 July US Jobless Claims, US PPI, US Phil Fed

– Friday 16 July US CPI, US Retail Earnings

– Monday 19 July -German PPI, Euro zone Industrial Production

– Tuesday 20 July US Redbook

<B>Contribution by HSBC</B>