After the solid dollar selling that punctured technical levels of last week, a relief rally in the dollar started. Oil prices softened, US stock markets gained, geopolitics eased down, and traders took profit in the other currencies that defied the dollar.

As heightened supply side concerns faded away, the dollar made a modest recovery as investors risk appetite rebounded. Traders? reluctance to extend the dollar downtrend prompted a pullback, catalyzed by technical elements. The dollar shrugged off sharp declines in December US home sales data and rallied on the back of rising US treasury yields and robust US durable goods data.

These two economic indicators were valid clues that the world largest economy was on steady path towards recovery. US Treasury yields on two-year notes hit a high of approximately 4.50% while the yield on ten-year bonds climbed to approximately 4.54%. US durable goods orders rose by 1.3%, beating analysts forecast of 1%. These robust figures prompted some economists to raise their fourth-quarter US growth?s expectations.

However, the US growth report came out bearish showing economic growth decelerating to 2.8%compared to 4.1% in the previous quarter. Immediately the dollar lost ground, but was nursed back to health due to a higher-than-expected inflation reading in the gross domestic product. The core PCE price index, a measure of inflation under watch by the Fe-deral Reserve (FED), climbed 2.2% beating economists forecast of 1.6%.

This fuelled expectation that the FED would continue with their inte-rest rate hike campaign. Market talks believed that the FED would hike up the US interest rates to 4.50 % on January 31 with further increases in March. That was enough information to trigger a mass exodus of dollar bears. Against the Mauritian rupee, the dollar was trading at 30.818.

The Sterling held its own in last week trading, powered to a four-month high against the dollar. A batch of strong economic growth data ignited the expectations that UK?s interest rates would remain uncut. British economic growth picked up at its fastest pace in the fourth quarter of 2005. According to the Office for National Statistics, GDP rose by 0.6% in the last quarter outstripping analysts? forecasts for 0.5%. In light of the upbeat economic data, the Bank of England minutes showed that only one of the Monetary Policy Committee members cast a ballot favoring a rate cut.

Even if a few economic data came out bearish, the pound digested them with no major impact. However, with a thin UK data calendar this week, the Sterling would be opened to wide influences until the release of mortgage lending and consumer credit data. Against the Mauritian rupee, the Sterling was trading at MUR 54.77 Monday.

The Yen had a rough week as market talked about the US Federal Reserve increasing the interest hike on Jan 31. Japanese investors looking for better returns for their money, favored high yielding currencies like New Zealand and Australian dollars as their home currency yielded near zero interest income. Bullish US stock markets also had a negative effect on the yen as the investors borrowed yen at low interest rates to convert it into high yielding currencies.

The Japanese data also showed a fall in industrial production in De-cember from the economists? forecast of 1.9% to 1.4%. However, the market expected the Bank of Japan to react to the slow increase in the EUR interest rates in the recent months, by ditching the yen zero interest rates policy. It was sold at MUR 26.38.

Major data-events this week:

■ <B>1st Feb</B> : US Mortgage

■ <B>2nd Feb </B> : ECB rate, EZ PPI , US Jobless clms.

■ <B> 3rd Feb </B> : US Unemployment, US Durable goods

■ <B> 7th Feb</B> : US Redbook

<B> Vassan CALEEMOOTOO</B>