THE euro set new multi-year highs against the dollar in each day of last week, breaching the latest record level of 1.22 US dollar. Whilst Friday?s downbeat US job creation figures for November may have precipitated the dollar sell-off, attention remains focused on the funding of the growing US current account deficit. A recent Bank for International Settlements report showed OPEC countries, which mainly earned in dollars, had repatriated funds into their home currencies at an accelerated pace in H1 2003.

News that China could use reserves to build a strategic oil fund instead of deploying the money in US Treasuries as it used to, threw further fuel in the debate of whether the US would be able to attract enough foreign inflows to fund its deficit. The US interest rate level, which presently stands at a 45-year low of 1%, is oftentimes associated with the current account deficit problem. Australia, for instance, also runs a current account deficit but its currency has been setting new highs against the dollar above the 0.74 level on interest rate differential flows.

The interest rate differential presently stands at some 4% above the US dollar. This Tuesday?s FOMC rate-setting meeting will thus be closely watched for further clues on the US interest rate outlook. No change is expected in US rates, but investors are waiting to see whether the Federal Reserve will drop the phrase ?for a considerable period? when referring to how long interest rates will remain low.

Against the Mauritian rupee, the common currency was trading at MUR 33.36 as compared to MUR 33.81 a week earlier.

The yen took its cue against the dollar weakness during the week but intervention jitters by the Japanese authorities hindered traders from further dumping the greenback. Japan has sold a record 17.8 trillion yen this year in currency interventions, in a view to preventing its currency from hampering an export-led recovery of the Japanese economy.

At the end of November, Japan?s external reserves hit a record 644.569 billion dollars, up 18.3 billion dollars from October. Asked about any impact on the government?s dwindling funds and leeway for currency intervention, top diplomat Zembei Mizoguchi replied that this should not be of a concern.

On Friday, the Nihon Keizai business daily reported that the Japanese government planned to raise the ceiling by 20 trillion yen to nearly 100 trillion yen when it compiles an extra budget for the current fiscal year, which ends in March. A Ministry of Finance senior official was quoted saying that the cap would be increased dramatically rather than incrementally so that the ceiling ?never becomes a factor in the minds of foreign exchange market participants.?

Yesterday, the Japanese currency was offered at MUR 25.51 as compared to MUR 25.89 on last Tuesday.

Sterling flirted near five-year highs versus the dollar last week, as it capitalized from the dollar broad-based weakness, whilst also benefiting from a brightened interest rate outlook. News that manufacturing output surged one percent in October from September reinforced expectations of new rate hikes into Q1 2004. Current British interest rate levels stand at 3.75%, after the Bank of England (BoE) raised the cost of borrowing by 25 basis points in November. On a separate front, markets were also braced for Chancellor of the Exchequer Gordon Brown?s pre-budget report on Wednesday. Brown is expected to confirm he is switching the BoE?s inflation target to the harmonized index of consumer prices (HICP) used in the eurozone from the current RPIX measure. Given latest opposition to the proposal, the move is not expected to be sterling-supportive.

Yesterday, the pound was trading at MUR 47.39 as against MUR 48.58 on last Tuesday.

Contribution by HSBC