The dollar showed signs of exhaustion last week, losing ground against the euro despite robust US manufacturing data that reinforced expectations of higher US interest rates. The failure of the dollar to benefit from positive economic data and rising yield expectations reinforced the view that good news on the US cyclical front as well as future US interest rate hikes had already been priced into the current level of the USD.

The market focus is likely to shift back to the fundamental US twin deficits, i.e. its trade and budget imbalances, which could weigh upon the US currency. These structural infirmities were highlighted in a report by the International Monetary Fund which said the level of the dollar was still higher than that necessary to avoid a worsening of the US trade deficit.

The dollar was also pressured after the Russian central bank announced on Monday it would increase the share of euros in the euro-dollar currency basket it uses to guide its day-to-day market operations. The euro was flirting with the 1.2220 USD level at time of writing yesterday, up from around 1.20 a week earlier.

Beneficial impact on Asian currencies

Against the Mauritian rupee, the euro was trading at MUR 36.61 as compared to 36.01 MUR last week.

The yen initially lost ground against the dollar despite the recent revaluation of the Chinese yuan and its expected beneficial impact on Asian currencies. Political concerns over the fate of the reform-minded Japanese Minister of Finance over the issue of the privatisation of the Japanese postal system weighed upon the yen. Rising oil pressures also acted as a yen-negative. However, at the beginning of the current calendar week, the Japanese currency regained some lost ground as Japanese shares rallied above the psychologically important 12,000 level.

The sterling firmed over the week as the market seemed to have priced too aggressively the impact of the recent bomb blasts in London and expectations of a UK interest rate cut. Broad-based dollar weakness also underpinned the pound. The pound was hovering around the 1.7700 USD level late yesterday compared to 1.7425 a week earlier.

Yesterday, the pound was trading at MUR 53.06, up from 52.09 on the previous Tuesday.

Major data/events this week:

● Wednesday 03 August US mortgage and ISM non-manufacturing data EU retail sales

● Thursday 04 August US Jobless Claims German industrial orders ECB interest rate decision UK interest rate decision

● Friday 05 August UK manufacturing and industrial production data

● Monday 08 August UK PPI

Contribution by HSBC