The aggressive stance that the Federal Reserve (Fed) had taken in the past few months poured supports for the beaten-down dollar. Many analysts believed that bold actions were necessary to boost the US economy and to fuel a sustainable recovery in the later part of the year.

The Fed had already sent very strong signals by slashing 225 basis points off the overnight interest rates since September 2007 and would most likely cut rates further by another 75 basis points by the end of the year. On the other hand, futures market expected the European Central Bank (ECB) to follow its US counterpart by cutting euro zone interest rates by 50 basis points by the end of the third quarter. That expectation was sparked when service sector growth data across the 15 main nations in the euro zone contracted for the first time in 4-1/2 years. In another euro zone report, data showed sluggish growth in retail sales for the month of January. These prompted traders to get rid of their long euro positions. Consequently, the euro fell by over one percent against the greenback. In late New York trading session, the euro was traded at $1.4640, a fall of 1.3 percent on the day. This sudden weakness of the euro propelled the US currency across the board despite dovish US service sector data. Besides, the dollar index, a measure of the US currency?s value against a basket of currencies, closed the day at 76.116, its largest one-day percentage advance since mid-December and moving away from the two-month lows.

Towards mid-week, things started to turn sour for the European common currency. Investors increasingly were betting that the drag on the US economy would eventually seep onto the G 10 universe. This would eventually force the other central banks to adopt more accommodative monetary policy. The euro shed three cents and was seen weakening in the coming days. The ECB kept its key interest rate at four percent on Thursday and the ECB?s Chairman, Jean-Claude Trichet, dropped a threat to act preemptively in the event of inflationary pressures. However, he also concurred that high uncertainty in the market might hurt the European economy. Although, the euro was holding at about three percent below last November?s record high against the dollar, it was still ten percent higher than a year ago.

● <B>The US dollar traded at MUR 29.13 yesterday same as last week.</B>

Sterling fell under pressures as the spectre of recession resurfaced. Speculations were running wild that the Bank of England (BoE) would be cutting UK?s borrowing costs more aggressively than what was initially expected. Despite UK?s service sector activity data picked up in January and that UK?s house price survey from HBOS Plc?s Halifax remained constant on the month compared with forecast of a 0.4 percent decline, the pound failed miserably to pump some excitements into the market.

After the BoE cut UK?s interest rate by 25 basis points, the pound got a brief respite. The market had already priced in the cut but market players were more interested in trying to find clues as to whether more interest rate cuts were in the sleeves of the BoE.

● <B>The Sterling was traded at MUR 56.82 as against MUR 57.45 last week</B>

The yen rose across the board during last week?s trading propelled by the steep sell-off in the equity market. Risk-averse investors liquidated carry trade positions in which the low-yielding Japanese currencies were used to fund purchases of assets with higher yields. Tokyo?s Nikkei share average plummeted 4.1 percent, following the sharp drop in Wall Street the day before.

Trade was relatively quiet, with many Asian players away for the Lunar New Year break. Financial markets would resume as normal on Tuesday after Japan?s national holiday on Monday.

The Japanese yen was traded at MUR 27.25 as against MUR 27.29 last week.

<B>Vassan CALEEMOOTOO</B> <I>HSBC Mauritius Treasury and Capital Markets</I>