Last week trading saw the dollar slide against the major currencies on the back of various negative dollar factors despite the Federal Reserve raised the US interest rate by a quarter-percent point to 3.50 % on 9th August 2005 for the 10th consecutive time. This positive effect of the hike in US interest rates was nullified as it was already factored by the market. Against the European single currency, the US dollar fell to a 2-1/2 month low of $ 1.2486 on Friday, close to the psychological level of $ 1.2500.

The negative dollar sentiment was due to widening US trade deficit, China’s choice of it’s basket of currencies, and last but not least the intention of the oil rich countries to change some of their Reserve foreign currencies holdings to the Euro from US dollars. The Trade data showed that the deficit had widened to $ 58.8 billion in June although less than the market’s expectation of above $ 60 billion.

The US dollar’s 30 percent decline in the three years to 2004 stemmed mainly from concerns about the ability of the United States to finance its massive current account deficit, which at $ 195.1 billion in the first quarter reached 6.4 percent of gross domestic product. After the loosening of the yuan peg to the dollar, China’s need for buying dollars might be reduced. In the past, China was selling yuan and buying US dollars to invest in the US treasuries to control the yuan’s exchange rate.

<B>Yen strengthens</B>

However, dollar’s losses were kept in check as the market still holds on to its positive sentiment on the US dollar due to expectation of a gradual increase in US interest rates in the coming future which may attract investors to buy dollars. Reports from the US Treasury showing an increased foreign demand for US assets in June also boosted the US dollar. The foreign inflow of $ 71.2 billion in June, the largest net inflow since February was more than enough to cover the trade deficit. The positive sentiment about the robust US economy still persists and may influence the trade markets in the coming weeks.

The US dollar traded at MUR 29.92 last week.Against the Mauritian rupee, the euro was trading at MUR 37.27 yesterday as against 36.13 a week earlier.

The Yen recorded gains last week due to various positive factors. Japan’s gross domestic growth (GDP) grew at a solid pace of 0.3 percent in second quarter. Moreover, foreign investors snapped up Tokyo shares on the improving economic outlook, pushing the Japan’s stock market indices to a four-year high and driving the yen higher.

Market players are predicting that this upbeat trend of the yen has just started and might influence the market for some more time in the coming future. There also seems to be a positive yen sentiment on the outcome of the September 11th elections. The yen rose to a seven-week high of 109.05 per US dollar from a low of 111.80. The yen was sold at MUR 27.54 as compared to MUR 26.89 last week.

Earlier in the week, sterling rose against the US dollar due to the combined effect of the US widening trade deficit and the positive inflation report of Bank of England (BOE), suggesting that the Bank of England was in no hurry to cut UK interest rates after this month’s easing of the interest rates by a quarter percent to 4.50 %.

The pound’s rise was further supported by stronger than expected British producer prices data and better trade balance figures as reported by the BOE. This week the market will be closely awaiting UK data including retail sales, consumer prices and unemployment data. The Sterling was traded at MUR.54.33 as against MUR 53.54 last week.

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

■ <B>Wednesday 17 Aug: </B> US Mortgage index and US PPI.

■ <B>Thursday 18 Aug:</B> US Jobless claims, GB Retail price index.

■ <B>Tuesday 23 Aug: </B> US Redbook, Home sales data.

<B>Contribution by HSBC</B>