The US dollar started the week on solid footings, rising to a one-year high against the euro, as falling oil prices and a bounce in US stock overcame concerns about the health of the US financial sectors.

The dollar shrugged off news about a troubled Lehman Brothers because investors believed that the US economy was more resilient than most economies in times of financial difficulties. In fact, US investors were liquidating their positions in overseas equity and bond markets, repatriating the money back home, hence, lending support to the dollar. According to analysts, the uncertain global economic outlook prompted US investors to liquidate assets in emerging markets where inflation was an issue. Further pressing the euro down was the downward revision by the European Commission on Wednesday to lower Euro zone growth forecast from 1.7 percent to 1.3 percent.

Toward the end of the week, the US dollar got its breath knocked out when steep falls in Wall Street stocks led by Lehman Brothers stroke worries about the shaky US financial sector. Shares in Lehman Brothers Holding Inc, the fourth largest investment bank, nose-dived on concerns over its ability to raise capital after news hit the market that negotiations with a Korean bank failed. This prompted traders to dash out of risky trades, pushing the dollar lower against a basket of currency. The dollar index, on the ICE Futures Exchange, which measures the greenback?s value against six major currencies, was flat at 79.535.

The US dollar traded at MUR 30.03 as compared to MUR 29.73 as last week. The Japanese yen edged up against the US dollar, reaching its highest level in over two years, as spooked investors waited for news about the state of health of Lehman. In addition, the fragile state of Asian stock markets prompted many investors to unwind carry trades, in which low-yielding yen had been used to fund the investment in higher-yielding currencies and assets. Overall the yen had been the best performer this week due mostly to a rise in risk aversion, decline in equity markets and a fall in bond?s yield.

The Yen was traded at MUR. 28.75 When compared to MUR 26.61 last week.

The pound hit a 2-1/2 year low against the dollar after the Bank of England policy maker, David Blanchflower pointed to a deeper than forecast decline in the UK economy and a rise in unemployment. Blanchflower told the British parliament?s Treasury Committee that the unemployment claims would rise above 60,000 and that the concerns were focusing too much on inflation numbers. This remark caused traders to dump the pound especially when other BoE policy members were acknowledging that growth in the UK would be weak.

The Sterling was traded at MUR. 53.82 when compared to MUR 52.15 last week.

Vassan Caleemootoo HSBC Mauritius Treasury and Capital Markets