In his debut in front of the US House Financial Services Committee, Ben Bernanke established himself as an-inflation fighter. He commented that the US economy was running near optimum capacity and pointed out that inflationary concerns were real. In highly volatile trading, the dollar strengthened, shrugging off poor US net capital inflows for December. In fact, December?s figure was weaker than both the $ 82.3billion analysts? projected and the November?s upward revision of $ 91.6billion. A breakdown of the figure showed that US appetite for foreign securities had risen while foreign appetite for US Treasuries had fallen. Comparatively for December, antipodean currencies like the Australian and New Zealand dollars, were the big winners. Foreign net acquisitions of US Treasuries slumped to $ 18.28billion in December from a revised record of $ 54.55 billion in November. However, net capital inflows for 2005 hit a record level of $ 910.7billion, exceeding the annual requirement of $ 725.8billion to fund the gap.

The dollar pared gains with most major currencies throughout the week with the market betting on interest rate differentials to win most battles. Indeed serious market-movers like institutional traders, hedge funds, and other fund traders, were positioning themselves, after the second round of Bernanke?s congressional testimony. As expected, the new FED chairman marked the second day of testimony with his stamp of approval for the hawkish stance the central bank would take on monetary policy. Even St Louis Federal Reserve President, William Poole, concurred with Bernanke?s assessment citing the risk of a pass-thru of energy costs.

Believers of charts still advocated positive dollar sentiments, although they also believed that the dollar rally might need some fresh fuel. The euro ended a wave ?b? correction and had moved to the initial stages of a wave ?c? rally. Friday, the euro ended in a bullish hammer candle and daily stochastics were highly oversold, positive, and rising. Immediate resistance for the euro/dollar comes in at 1.20. If the euro closes above the resistance level, a risk of a rally may open the way for 1.2090. Immediate support for a potential wave 1 stands at 1.1910. More crucial support comes in 1.1840.

Against the Mauritian rupee, the dollar was trading at MUR 30.878 compared to MUR 30.848 a week earlier.

The Sterling looked sick throughout most of the trading sessions of last week, as it struggled to hold onto its gains. The pound initially firmed when the Bank of England projected that inflation would hover around its 2.0 percent target and that growth would pick up stronger than its historical average in the short term. However, the market started to talk about possible interest rate cut as soon as the consumer price inflation report was released. In addition, the interest rates outlook deteriorated when the retail sales data fell by1.3 percent in the month of January, the biggest decline since December 2004.

Looking forward in the week, the risk of a pound rally is foreseeable. Indeed, a close over and above the immediate level of 1.7485 might launch a rally towards Fibonacci resistance at 1.7530. Immediate support comes in at 1.7350.

Against the Mauritian rupee, the Sterling was trading at MUR 54.04 yesterday as compared with MUR 53.95 a week earlier.

The Japanese yen went through another week full of seesaw trading sessions. In fact, the market was awaiting the outcome of Japanese growth data for the last quarter of 2005. The data came out bullish and offered traders the possibility to square off their positions. Japan?s gross domestic product grew at a price-adjusted 1.4 percent pace from October to December 2005 with an annualized figure of 5.5 percent. However, the prospects of higher yields in the US denominated assets erased most of the yen gains.

The yen was sold at MUR 26.43 as compared to MUR 26.08 last week.

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

■ <B> Wednesday 22 Feb</B> US Mortgage Indx, CPI, Redbook

■ <B> Thursday 23 Feb</B> US jobless claims

■ <B> Friday 24 Feb</B> US US Durable goods, GB GDP 2 qq

■ <B>Monday 27 Feb</B>

■ <B>Tuesday 28 Feb</B> US GDP, Redbook, Chicago PMi

<B>Contributed by HSBC</B>

<B>Vassan Caleemootoo</B>