Last week trading session took a particular turn as Korea test-firing a barrage of missiles that rattled market players. Immediately, investors rushed to park their funds into the safe-haven US currency causing the dollar to bounce. However, the dollar rally was short-lived despite a report that US private sector s showed solid job growth in June.

The dollar started on a strong footing against the major currencies, as traders turned to the US currency after North- Korea defied international warnings and tested a series of missiles. In addition, positive dollar sentiment prevailed as the National Employment Report showed that private sector employers added an estimated 388,000 jobs in June. This prompted many investment banks to raise their forecast of June’s nonfarm payrolls. For many analysts, job data played a huge role in helping the market determining whether the Federal Reserve might have yet another interest rate hike in its sleeves. In addition, many foreign central banks had already embarked themselves in a monetary tightening campaign.

Toward the middle of the week, the fragile positive US dollar sentiment received its first blow, fortunately not by Korean nuclear blast, but by Trichet’s comments who hinted at a possible rate hike in August. Actually, the Central Bank President Jean-Claude Trichet pledged “strong vigilance’’ in his combat against inflationary pressures in the eurozone. The euro rallied sharply against the dollar reaching a season peak of $1.2784, before surrendering some of its gains to come down to $1.2777, in the New York session.

Later in the week, the US dollar plumbed one-month lows against euro to $1.2865, after US job growth report showed a weaker-than-expected figure of 368 000 jobs in June signaling a slow down in the US economy. Ultimately this drawback lead to market speculation as to whether the Fed would need to change the pattern of raising interest rates in the near future.

The US dollar traded at MUR 31.18 yesterday compared to MUR 31.01 last week.

Sterling bounced up initially and settled to a low narrow range against the US dollar thru last weeks trading. The Bank of England kept UK’s interest rates on hold, but dovish UK house prices data quelled market expectation of any hike in UK’s rate this year. The pound got a breath of fresh air when, David Miles, a hawkish economist on interest rates, was offered a position with the Bank of England’s Monetary Policy Committee. The Monetary Policy Committee had only seven members after the departure of Richard Lambert and the death of David Walton. This news rekindled market’s expectation of a British interest rate hike in the near future. This market view was later offset by mixed economic data prompting many to believe the Bank of England was in no hurry to raise interest rates from the present 4.50 percent.

The Sterling was traded at MUR57.94 as against MUR 57.53 last week. The Japanese Yen was caught in the midst of North Korea’s decision to go ahead with the nuclear testing against set international norms. With scare news available on the launches, traders dumped the yen and sought refuge in the US dollar. Further developments leaked out that Pyongyang fired at least six missiles including a long-range Taepodong 2. At Japan’s request, the UN Security Council would be meeting this week to discuss the firing of the missiles. Later in the mid-week the yen strengthened due to the market’s expectation that the Bank of Japan would be raising interest rates this month for the first time in six years. Although traders were unsure on how high would the yen go since even with a hike, Japan’s interest rate would still be too low compared to other major currencies.

The yen was sold at MUR 27.61 as compared to MUR 27.34 last week.

<B>Major data-events this week :</B>

<B>Wednesday 12 July</B> : US Mortgage index, International trade.

<B>Thursday 13 July</B> : US Jobless claims, US Fed budget

<B>Friday 14 July</B> : JP BOJ decision US Retail mm

<B>Monday 17 July </B>: EZ Ind Prod mm & yy

<B>Tuesday 18 July</B> : GB CPI yyEZ Foreign trade

<B>Vassan Caleemootoo

HSBC Mauritius Treasury and Capital Markets</B>