THE DOLLAR tumbled broadly on Monday, failing to draw support from a G7 warning against foreign exchange volatility at the Group?s meeting in Florida. The group of seven most industrialised nations cautioned against excess volatility and disorderly movements in exchange rates, which were seen as undesirable for economic growth.The dollar had a knee-jerk reaction and ticked up instantaneously on the news, as the market thought this signalled the end of the single currency rally.

However, traders trimmed back their long dollar positions after they realised that the G7 countries were unlikely to take any concrete, concerted action to stop the dollar?s decline. Added to that is ongoing speculation that Washington did not mind a weak dollar, given its huge running deficit and waning foreign investment flows. Earlier on Thursday, the greenback afforded a brief boost after Federal Governor Bernanke commented that US deflation risks had receded substantially, thereby hinting at the likelihood of monetary tightening being back on the scene again. However, the dollar quickly erased its gains the next day after employment figures showed the economy created only 112,000 jobs in January, against an expected 150,000.

Against the Mauritian rupee, the common currency was trading at MUR 33.06 as compared with MUR 32.50 a week earlier.

The yen traded in range on Monday in the wake of the G7 meeting, with market players hesitant to push up the yen despite a faltering dollar. Indeed, the official Japanese spin on the G7 meeting was that its intervention policy was endorsed, and that the argument of non-flexibility was actually levied against countries such as China as opposed to Japan. This would seem to support ideas that the Japanese authorities will continue to intervene in the foreign exchange market and continue to be a buyer of US Treasuries. And this point is important as the US Treasury auctions some $56 bln of notes and bonds this week as part of the quarterly refunding. As a result, traders have been cautious not to be aggressive selling the dollar down against the yen. Japan sold a record 20 trillion yen ($188.8 bln) last year and another seven trillion yen last month to curb the yen?s export-damaging rise.

Yesterday, the Japanese currency was offered at MUR 24.73 as compared to MUR 24.86 on last Tuesday.

Sterling tracked the euro higher against the dollar on Tuesday, capitalising on the bear run of the greenback in the wake of the G7 meeting. Sterling?s strength is also underpinned by a widening interest rate differential after the Bank of England rose its overnight repurchase rate by a quarter of a percentage point to 4 per cent last Thursday. The Bank of England said in an accompanying statement that inflationary pressures were likely to pick up gradually over the next couple of years, holding out prospects of further monetary tightening. Market polls actually show most economists predict another rate hike as early as next May.

Yesterday, the pound was trading at MUR 48.62 as against MUR 47.76 on last Tuesday.

Major data/events this week:

Wednesday 11 February

German trade balance, GB unemployment

Thursday 12 February

German GDP Q4, US jobless claims, US retail sales

Friday 13 February

EZ GDP Q4, US international trade, US Michigan Preliminary

Monday 16 February

GB RPI, German ZEW index

Tuesday 17 February

NY Fed manufacturing, Industrial production

Contribution by HSBC