The US dollar showed its resilience in last week’s currency trading in the wake of the G20 meeting of finance ministers held last weekend. The US currency had been pressured the previous week by news that China was planning to diversify its $1 trillion foreign currency reserves (an overwhelming 70% of China’s reserves is in US Treasuries). Last week, the focus was on the G20 summit with expectations of comments on currency levels. The market was anticipating that finance ministers would single out the Japanese currency and talk it higher to stall currency carry trades ( in which investors would borrow in a low-interest currency, such as the Japanese yen, sell it and buy a higher-yielding one). Such comments would have weighed upon the US dollar. However, there were no specific comments on the yen’s exchange rate or any subtle reference to currency carry trades at the G20 meeting. Finance ministers also abstained from commenting on the US current account deficit’s contribution to global imbalances, which helped provide the dollar with some respite.

Instead of global imbalances, interest rate differentials remained the predominant theme in currency trading with investors looking for yield benefits. In that respect, whilst market consensus is that the European Central Bank will probably hike its base interest rate by 0.25 percent to 3.50 percent at its December meeting, market players are still guessing the Federal Reserve’s next move on US interest rates. A number of key US economic data released over the past week gave contradictory indications as to the probable path of future US interest rates. A five-month high in US manufacturing data came on the heels of tame wholesale price inflation figures and was followed by subdued retail CPI data, leaving the market to ponder about the direction of Fed rates. As of last Friday, the financial futures market was factoring in a 14% chance of a US interest rate cut by March next year; on balance the market seemed to lean towards steady US interest rates until at least first quarter next year.

The euro zone currency had reverted back to the 1.2800-1.2850 range at time of writing yesterday.

Locally, the US dollar was advertised at MUR 33.307 yesterday as compared to MUR 33.156 last week. The euro was indicated at 43.98 against 43.80 a week earlier.

Japanese yen under pressure</B>