Last week trading on currency market saw the dollar tumbling to a four-week high of $1.1324 against the European currency, troubled over the sustainability of the US economic rebound. A plethora of negative US economic reports released over the week had left investors fretting over the prospects US recovery still had significant soft spots.

A combination of disappointing employment figures, widening trade deficit, and weaker than expected consumer confidence and retail sales had cast a negative light on the greenback. To make matters worse, all the potential good news about the US economy that could have been dollar supportive seemed to have been fully discounted.

But more worrying for the dollar was that given the spate of negative data, market?s focus has now reverted to the US economy?s structural weaknesses. These are primarily the current account ? a broad measure of global trade ? and budget deficits. Market players are now mulling over the longer term impact of the rising US current account and budget deficits, which after President Bush asked Congress for additional $87 billion for the costs for Iraq, would likely exceed $500 billion.

With the market now focusing more on the deficit issues rather than on growth strategies, the twin deficit will most likely exert more downward pressure on the greenback. The FOMC interest rate meeting on Tuesday where US interest rates are expected to remain unchanged is unlikely to alter the perception that the dollar downward trend has resumed.

Against the Mauritian rupee, the common currency was trading at MUR 33.14 as compared with MUR 32.64 a week earlier.

In contrast to its generalized descent across the board, the dollar firmed against the Japanese yen on suspicion that the Bank of Japan was once again in the market buying dollar and selling yen. Much of Japan?s yen-weakening intervention efforts arose out of the concern that a higher yen would derail Japan?s export-reliant economic recovery. It is widely believed that 115 yen is a key level which Bank of Japan will be determined to defend.

Yesterday, the Japanese currency was offered at MUR 25.09 as compared to MUR 25.29 last Tuesday.

Despite the absence of major British data, Sterling hit a one month high against the dollar, benefiting mainly from across the board dollar weakness after a series of bad US figures dampened expectations of a rapid growth in the US economy. Last weekend?s referendum results in Sweden with the ?no? winning could have significant impact on euro/sterling, as it would reduce the probability of holding a referendum for UK?s entry into euro.

Yesterday, the pound was trading at MUR 47.09 as against MUR 46.70 last Tuesday.

Major data/events this week:

Thursday 18 September UK Retail Sales, US Jobless Claims, and US Philadelphia Fed Survey

Friday 19 September German PPI

Tuesday 23 September US Redbook

Contribution by HSBC