Last week?s trading on the currency market saw the dollar?s six-week rally against the euro stalled on back of concern about a record US trade deficit, despite the gap narrowing slightly in December.

US data released last Thursday showed the trade deficit in the world?s largest economy surged 24 percent to a record $ 617.7 billion in 2004, although the shortfall narrowed to $ 56.4 billion in December from a November deficit of $ 59.3 billion.

The market had expected the US trade deficit to narrow in December, particularly after US Federal Reserve Chairman Alan Greenspan made upbeat comments on the current account deficit.

The dollar had rallied in recent weeks on signs of US economic strength and the prospect of further domestic interest rate rises offsetting concern over the need to attract flows into the United States through a weakening currency.

While the current dollar?s weakness did not signal a sentiment shift back to focus solely on US structural problems, it did show that concerns about the twin deficits remain a factor in the market. A key driver for the dollar direction will be Alan Greenspan?s semi-annual testimony to Congress today and Thursday.

Against the Mauritian rupee, the euro was trading at MUR 37.60 as compared with MUR 37.02 a week earlier. Over the week, the Japanese yen recouped almost all of its earlier losses to trade at 105.00 yen per dollar, after hitting a fresh three-month low of 106.86 yen per dollar.

Future rate policy

The US currency hit three-month highs against the yen, in part due to tensions in Asia after North Korea pulled out of multilateral talks and admitted to having nuclear weapons. Increased tensions in the Korean peninsula could hurt theYen, helping boost the dollar. The dollar might climb to a range of 105 to 108 against the yen.

Yesterday, the Japanese currency was offered at MUR 27.67 as compared to previous Tuesday?s 27.70.

Sterling bounced back from an 11-week low against the dollar after the release of US trade deficit figures. However, widely anticipated Bank of England decision to leave UK interest rates steady on last Thursday at 4.75 percent did not help sterling watchers desperate for future rate policy clues following a recent run of mixed, albeit slightly positive, UK data. Investors are now keenly awaiting the Bank of England quarterly inflation report today for firmer interest rate clues.

Yesterday, the pound was trading at MUR 54.71 as against MUR 53.87 last Tuesday.

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

Wednesday 16 Feb US Industrial Production

Thursday 17 Feb UK Retail Sales, Euro Zone Industrial Production, US Jobless Claims, US Philadelphia Fed

Friday 18 Feb US PPI

Monday 21 Feb

Tuesday 22 Feb US Consumer Confidence

<B>Contribution by HSBC</B>