THE DOLLAR staged a broad rally during the week, notching its biggest gain against the euro in five months as upbeat US data exacerbated the downfall of a single currency already weighed down by its own European officials? rhetoric.

European Central Bank (ECB) Chief Economist Otmar Issing and ECB Council member Guy Quaden became the latest in a barrage of European officials to warn against the excessive rise of the euro which was, in particular, hurting eurozone exports.

During the week, French Finance Minister Mer and German Economic Minister Clement echoed ECB President Trichet that the euro level was cause for concerns; reinforcing market views that $1.30 to a euro was the threshold of pain for the European. On Tuesday morning, the euro was trading at $ 1.2380, down some 6 cents or 4.7 % from its record-high of $ 1.2989 reached last Monday.

Data on the upside also lent broad-based support to the greenback, of which the most important one was the improvement in the US trade gap. The trade gap, often cited as a key driver of the dollar?s persistent weakness, narrowed unexpectedly to $38 billion in November, compared with market expectations of a shortfall of $42 billion. Separately, US Treasury data showed foreigners increased their net foreign purchases of US assets, spending some $87.6 billion in November - triple the revised $27.8 billion figure in October. The US needs to attract roughly $1.5 billion a day in order to bridge the gap in the current account deficit.

The deficit creates downward selling pressure on the dollar and has been cited, along with 45-year low benchmark interest rates, as reasons for foreigners to shy away from US assets. Market participants are now braced for the next G7 meeting to be held in Florida on February 6-7, where the current US dollar level is expected to be on agenda.

Against the Mauritian rupee, the common currency was trading at MUR 32.68 as compared to MUR 33.70 a week earlier.

The yen traded in range around the 106 level versus the dollar on Tuesday, holding on to its gains despite a broadly recovering dollar as Japanese exporters swooped in to convert their dollar proceeds as the dollar rose.

Yield pick-up advantage of Sterling

The 106 level is seen as a critical support level for Japanese officials keen to protect the dollar upside after they were seen intervening massively in the market to sell yen against dollar whenever the latter threatened to slip below 106. This year, Japan is thought to have conducted some five trillion or so of yen-selling intervention, on top of the huge 20 trillion yen ($ 188.2 billion) last year. In addition dollar bulls expect the likelihood of short-covering in the dollar to have increased, given the massive huge yen-long positions taken by speculators through futures contracts.

Data from the Commodity Futures Trading Commission showed on Friday that yen futures speculators extended net long positions to 60,602 contracts in the week to January 13, as compared to 56,834 contracts a week earlier.

Yesterday, the Japanese currency was offered at MUR 24.62 as compared to MUR 24.84 on last Tuesday.

Sterling withdrew against the dollar on Monday as traders took profit on the cable following 11-year highs hit recently. The position-squaring was thought to have been triggered by a deteriorating technical charting outlook, and most important, diminished likelihood of a rate hike. Much of sterling?s gains in the last few months were garnered due to the yield pick-up advantage of sterling over the other G7 currencies.

However, a recent drop in manufacturing output in the UK has squeezed the BoE?s leeway to increase rates. UK labour market data also showed unemployment falling again, but this showed no signs of sparking any wage inflation.

Yesterday, the pound was trading at MUR 47.19 as against MUR 48.84 on last Tuesday.

Contribution by HSBC