The US dollar sufferings continued as expectations of a Federal Reserve (Fed) interest rate cut eroded its appeal to investors worldwide. Bullish statements from the European Central Bank?s chairman, Jean-Claude Trichet, indicated that the euro zone had limited exposures to the US subprime crisis and would not witness any default from European financial institutions.

The US housing and credit crisis sent shivers down the spine of investors who started to see signs of curtailing US economic growth everywhere. The US payroll report panicked investors when it showed that the August payroll shrank for the first time in the past five years. The National Association of Realtors cut it?s housing forecast for the seven months straight months.

Besides, US treasury Secretary Henry Paulson recognized that markets would be slow to recover from the rising mortgage defaults and the massive losses on bonds backed by risky home loans. The euro had a knee-jerk reaction vaulting to $ 1.3835, a breath away from the record high of $ 1.3850. The speech of Fed Chairman, Ben Bernanke in Berlin, did nothing to soothe the expectation of Fed cut of at least 25 basis points on September the 18th. However, the implied chance of a fall of 50 basis points in interest rates had receded somewhat.

With the Fed expected to trim benchmark rates, investors flocked to the euro, especially when Trichet?s hawkish stance was giving signals to the market that the European Central Bank?s monetary policy might be accommodative and that interest rates in the euro zone might go up in the near future. Consequently, many currency strategists believed that Trichet gave the euro enough fuel to be on route to $1.40.

Sterling started the week on a strong foot as investors moved into riskier positions with the prospect of a fall in US interest rates. Many traders resumed carry trades by borrowing low yield currencies to fund high yielder ones. However, the collapse of Victoria Mortgages and of Northern Rock prompted fears that the UK could be exposed to the subprime mortgage problems after all.

According to Victoria Mortgages officials, the company had gone into administration as the increased cost of borrowing made it unable to fund new loans. In addition, a batch of weak trade data put the pound under additional pressures. British goods trade gap widened to 7.065 billion pounds. The UK?s currency continued its downfall after the Bank of England Governor Mervyn King, in a submission to parliament?s Treasury committee, stated that all central banks would be ready to intervene to prevent shocks to the global financial system. He also added that splashing the system with liquidity weakened the efficient pricing of risks. Mervyn comments led many analysts to believe that the BoE might be softening on the macro front and might not be too keen in raising UK?s interest rates any further this year.

The Japanese yen firmed up as focus were on the lingering credit squeeze in the US. Japan?s core private-sector machinery orders, a key gauge of corporate capital spending, rose 17.0 percent in July from the previous month, exceeding market forecast of a 5.3 percent rise. Towards the end of the week, the yen slipped as news hit the market that Japanese Prime Minister Shinzo Abe would step down. In addition, market players expected that the Bank of Japan would keep interest rates constant at 0.5 percent.

<B>Vassan CALEEMOOTOO HSBC Mauritius Treasury and Capital Markets</B>