The European currency kept roughing up the dollar as a recovery in global stock markets rekindled investors? hunger for riskier assets. The latter were ready to dump the greenback as the specter of an interest rate cut kept hanging over its head.

As news hit the market that U.S. banks were writing off huge amounts, sentiments of a spilled over effect on the foreign exchange market kept fuelling increasing degrees of risk aversion among investors. Merrill Lynch & Co. Inc announced that they had made a write-down of $7.9bio related to the subprime mortgage turmoil. In addition, analysis pointed out that sales of previously owned homes nose-dived to the record low of 5.04 million units in September and that did nothing but to strengthen the case for another Federal Reserve interest rate cut this week. U.S. short-term interest rate futures had already factored full 25 basis points cut at its monetary policy meeting this week. A fall in the US interest rates would further diminish the allure of US-denominated assets. On the other hand, market players expected the European Central Bank to keep interest rates in the euro zone constant at 4.0, causing the euro to vault to a historical high of $1.4344. The dollar index, a measure of the greenback against a basket of currencies, fell 0.3 percent to 77.280 creeping toward a record low of 77.093.

Towards the end of the week, the greenback had a knee-jerk reaction when a report showed that US new home sales and the median sales price rose in September while inventory of home for sales fell. However, the superficiality of these gains evaporated as investors were concerned that these data might mask a general underlying weakness.

● <B>The US dollar traded at MUR 31.008 yesterday same as last week</B>

News on the Sterling were quite scare for the past week. Market rallies were mostly fuelled by Merrill Lynch?s woes and concerns that the subprime crisis might be seeping thru to the other sectors of the U.S. economy. In addition, the allure of high yielding pound looks very attractive to investors specially when interest rate in the U.S. was falling.

However, the fashionable currency showed signed of weakness when data from the British Bankers? Association showed that mortgage approvals fell an annual 27 percent last month, posting their lowest September reading in seven years. According to analysts, signs of slowdown in the housing market could mean that interest rates in the UK had peaked and that the next move of the Bank of England might well be a cut.

● <B>The Sterling was traded at MUR. 63.89 as against MUR 63.13 last week</B>

The Japanese yen soars last week after huge losses at the world?s largest brokerage firm and weak US housing data cooled down risk takers and made them cover their short yen positions. The Japanese currency had been mostly driven by swings in the equity market, which was a yardstick of investor appetite to hold risky positions.

Furthermore, the yen showed muted reaction to data showing Japanese core prices falling 0.1 percent in September as forecast by economists. The lack of inflationary pressures had kept the Bank of Japan from increasing the pace of interest rate hikes this year. Analysts concurred that the BoJ would wait until next year to hike rates further.

● <B>The Japanese yen was traded at MUR. 27.10 as against MUR 27.05 last week</B>

■ <B>Major data/events this week:

<B>Wednesday 31 Oct: US Mortgage index, Core PCE, GDP, FED rate JP BoJ rate <B>Thursday 01 Nov: </B> <B>Friday 02 Nov: </B> US Durable <B>Tuesday 06 Nov: </B> US redbook EZ Retail

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