The dollar gave up some of its recently-gained ground during the first part of last week as market players repositioned themselves following the recent dollar rally, considering that dollar purchases on expectations of higher US interest rates might have been overdone.

Failure to pressure the euro below the critical level of 1.1900 also underpinned the retreat of the greenback from its previous highs. A weaker-than-expected US services sector report added to the dollar decline.

On Thursday, the dollar posted its biggest one-day drop against the euro in over three years on market re-positioning, tumbling to 1.2179 per euro, helped by hawkish comments by the President of the European Central Bank, Jean Claude Trichet.

However, the US currency showed its resilience by recouping to a large extent its losses to trade back around the 1.2000 per euro level. The dollar rebound was mainly driven by supportive US jobs data released last Friday.

The figures showed that the US had shed by far fewer jobs than was expected in September. Whilst forecasted job losses for the month were at 143 000, actual losses stood at only 35 000. The greenback was offered at MUR30.52 yesterday compared to 30.50 a week earlier. The euro gained 37 cents, rising to MUR 36.88.

The Japanese yen remained under pressure last week on sharp drops in Japanese stock prices. Japanese investors’ appetite for foreign bonds remained strong, thus weighing on the Japanese currency.

<B>Loose monetary policy</B>

On the other hand, the Bank of Japan became under increasing pressure to put an end to its ultra-loose monetary policy. Higher Japanese interest rates would have helped the Yen. However, most analysts do not expect that to happen before the second quarter of 2006 .

The JPY was offered at MUR 0.2693 yesterday, hardly moving against the local currency.

The British pound initially rose from the 1.7625USD level to trade around 1.7725 as the dollar rally faded. However, a number of negative factors hit the sterling. UK Industrial output fell at its sharpest pace in five months in August while house price inflation slowed to an annual rate of 2.8 %, reinforcing the market view that the Bank of England might cut interest rates again by the end of first quarter 2006. Analysts do not rule out a rate cut as early as November this year.

On Thursday, the British Central Bank announced that it was leaving UK interest rates steady at the official level of 4.50 %. GDP data released on Friday showed that UK economic growth slowed to its weakest rate in four months in the third quarter, adding to the sterling’s woes. The pound had dipped below the 1.7500 USD level at time of writing yesterday. The sterling was offered at MUR 53.60 yesterday, 10 cents lower than a week earlier.

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

<B>Wednesday 12 Oct</B> German CPI, US mortgage index

<B>Thursday 13 Oct </B> US international trade and Federal Budget

<B>Friday 14 Oct</B> US CPI, retail sales and industrial production; Michigan preliminary index

<B>Monday 17 Oct </B> Bank of Japan minutes

<B>Tuesday 18 Oct </B> UK CPI; US Producer Price Index, Redbook and Capital Net Flows

<B>Contribution by HSBC</B>