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Euro’s reversal of fortune
Last week trading on the currency market saw a reversal of fortune for the euro against the dollar, with the single currency recouping its losses after having traded on a negative footing in the aftermath of US job figures. The release of much expected US job data showed the U.S. economy created more jobs than previously estimated, which supported views that the Federal Reserve would hold its benchmark interest rate steady.
The report indicated tight labor markets, which might eventually feed into higher wage costs and inflation, prompting the Federal Reserve to rule out any US interest rate cuts, even if it would not raise interest rates. The tightness of the labor market should quell any expectations of an imminent interest rate cut at least through the first quarter 2007.
However, dollar’s rally ran out of steam, as it fell prey to profit taking by investors ahead of US congressional elections, and after San Francisco Fed President Janet Yellen said some countries with excess savings might invest less funds in U.S. denominated assets. Yellen’s comments seemed to have provided a catalyst for dollar selling.
Furthermore, the greenback also slipped against the euro on back of comments by ECB President Jean-Claude Trichet. He had indicated that the ECB could raise interest rates next month, potentially narrowing the U.S. interest rate advantage. Speaking after the ECB had left interest rates unchanged at 3.25 percent on last Thursday, ECB President had called for “strong vigilance” in maintaining price stability, a signal that market analysts understood to mean an interest rate increase was in store. Against the Mauritian rupee, the euro was trading at MUR 43.39 as compared to 43.23 MUR last week.
Future increase of Japanese interest rate</B>
Over the week, the Japanese currency strengthened against the dollar after Bank of Japan Governor Toshihiko Fukui said the central bank would raise interest rates preemptively to avoid sharp economic swings. Fukui’s comments, coming after he had previously said he would not rule out a rate increase before year-end, helped to stoke expectations for a near-term move and prompted market players to trim their bets against the Japanese currency.
The yen had suffered as investors had earlier shunned the low-yielding currency to buy those with high or rising yields. The BOJ chief also repeated that future credit tightening would be gradual and the central bank had no pre-determined view on the timing of the next move.
Yesterday, the Japanese currency was offered at MUR 28.95 as compared to previous Monday’s 28.65.
Sterling rose against the dollar on the back of broad dollar weakness as the U.S. currency fell ahead of U.S. congressional elections that could result in political gridlock if the opposition Democrats take control of the House of Representatives from President George W. Bush’s Republican Party.
The pound also found independent support from upbeat British growth forecasts. The National Institute of Economic and Social Research projected that Britain’s economy grew 0.7 percent in the three months to October compared with the previous three months. The think tank said its forecasts showed UK interest rates needed to rise this week and probably again in February 2007. Yesterday, the pound was trading at MUR 63.86 as against MUR 63.74 last Tuesday.
<B>Major data/events this week:</B>
<B>Thursday 09 Oct: </B>
UK BOE decision, US International trade and US Jobless Claims
<B>Monday 13 Oct: </B>
Japanese Confidence Index , UK PPI
<B>Tuesday 14 Oct:</B>
UK CPI &, PPI, Euro zone GDP, US Retail Sales & PPI
<B>Kiat fen LIM AH LAN
HSBC Mauritius Treasury
and Capital Markets</B>
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