The cloy smell of recession?hemorrhaging banks? profit?disappearing capital?aggressive interest rates cut? had many investors losing faith in the dollar. This had pushed investors to ditch the greenback to profit from higher yielding currencies.

However, the vast monetary stimulus proposed by the Federal Reserve to bail the US out of recession was not an unmixed blessing as it caused inflationary pressures to mount. The weak dollar had put Americans exposed to rising commodity prices more so than their counterparts in Europe or England. In an attempt to unwind this hot issue and to restore enthusiasm in the US currency, Ben Bernanke, the Federal Reserve Chairman, hinted that the US central bank would not continue the policy of a weak dollar and might be thru with cutting interest rates. For a fleet moment the dollar got back some respect after being manhandled by the European common currency. The latter fell to $1.5411 from $ 1.5628, its lowest level since three weeks. The New York Board of Trade?s dollar index, which charts the dollar?s performance against a basket of six currencies, jumped to 73.501, the highest since May 14.

Investors went ballistic when a batch of solid US services and private-sector jobs data fuelled expectations that the FED might even hike up interest rates in the near future. Besides, a large drop in oil prices from its record highs, gave another boost to the greenback.

A stronger dollar, other things remaining constant, would overpower other currencies and would make them weaker; hence, diffusing inflationary pressures by making US imports cheaper. However, that would not quell the underlying causes of inflation. All it did was to merely redistribute inflation to other countries wielding weaker currencies.

However, the European Central Bank?s (ECB) chairman, Jean-Claude Trichet seemed have understood that inflation-redistributing mechanism and retaliated by taking the bull by the horn. In fact, his language at the ECB policy meeting contained a veritable barrage of hawkish language. He stated that the governing ECB council ?would act in a firm and timely manner?? and that the euro zone was in a state of ?heightened alertness?? for any signs of inflationary tendencies building up. That type of lyrics vaulted the euro to $ 1.5601, recovering from a three-week low of $ 1.5366. A hike in the euro zone interest rates would burnish the allure of euro-denominated instruments as compared to USD denominated assets.

The US dollar traded at MUR 27.50 as compared to MUR 26.932 as last week.

The Japanese yen continued its slide after data showed robust US retail sales data for the month of May. In an addition, a rally in the stock market caused investors to sell the low-yielding yen for higher-yield ones. Rising stock tend to make investors and speculators more comfortable holding riskier positions like carry trades.

The Japanese yen was traded at MUR. 26.47 When compared to MUR 26.06 last week.

Sterling had a rough week as it got knocked around by a rally in the US dollar. In addition, bleak UK?s economic data and banking sector jitters spooked investors who rushed for cover. The pound fell to a two week low when Bradford and Bingley, Britain?s largest buy-to-let mortgage lender, issued a stark profit warning and announced the resignation of its CEO. Furthermore, hawkish comments held by the US FED chairman proved to be too much for the pound. It has continued its decent to as low as $ 1.9540 and according to analysts, Sterling weakness would continue for a while in the light of UK?s slowing growth and rising price levels.

The Sterling was traded at MUR. 53.702 when compared to MUR 52.94 last week.

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

■ Wednesday 11 June : US Mortgage index

■ Thursday 12 June : US Jobless Claims, retail sales

■ Friday 13 June : US CPI

■ Monday 16 June :

■ Tuesday 17 June : US PPI

<B>Vassan Caleemootoo</B> <I>Weekly Currency Review HSBC Mauritius Treasury and Capital Markets</I>