Darkness loomed around the greenback amid persistent fears over the health of the US financial institutions. These fears were further reinforced by the grim assessment made by the Federal Reserve on the sector.

Federal Reserve Chairman, Ben Bernanke, stated to the Senate Banking Committee that the US financial sector was still subjected to ?considerable stress? and that restoring stability was a top priority of the central bank. In addition, US Treasury Secretary Henry Paulson also stated that housing finance giants Freddie Mac and Fannie Mae might be the cause of systemic risks to the financial system.

The dollar got a brief boost when crude oil prices dropped its largest in 17 years. In fact, oil prices fell by $9.26 a barrel, causing a rally in Wall Street stocks. In addition, the Fed?s June minutes showed that the US central bank?s officials believed that inflationary pressures were still a major concern and that the next interest rate move might be a hike. US Consumer data showed that prices shot up last month and according to the Bank of New York Mellon strategist, Michael Woolfolk, the FED might sacrifice growth to curb inflationary pressures.

However, the dollar rally lost steam as investors believed that the storm was not over yet. According to analysts, dollar sentiments would remain grim as the credit crunch create by the US housing sector would continue. On the other hand, market players believed that higher interest rate might increase the attractiveness of dollar denominated assets but might also choke US economic growth.

The US dollar traded at MUR 27.23 as compared to MUR 27.33 as last week.

Sterling started the week on a bullish tone hitting a three month high against the greenback after UK consumer inflation rose to an annual 3.8 percent, dampening expectations of an early rate cut.

Soaring food and energy prices caused UK?s annual inflation estimate to nearly double the central bank?s 2 percent target. The pound rose to $2.0153, its highest rate since mid-March causing rising expectations that the Bank of England might not cut interest rates in the near future.

However, the pound retreated after data showed the number of unemployment in the UK rose by the largest amount since 1992, deepening UK economic downturn. According to The Office for National Statistics, unemployment rose by 15,000 last month after an increase of 14,300 in May.

Sterling sentiment remained bearish as policymakers were grappling with the dual difficulties of slowing growth and rising prices.

The Sterling was traded at MUR. 54.49 when compared to MUR 54.60 last week.

The Japanese started the week hovering around 104.16 yen. However, the dollar lost its footing and slid below the psychological level of 105 yen prompting many currency traders to start selling yen. Data from the Tokyo Financial Exchange showed traders boosted their dollar-long positives by the second biggest one-day amount on records going back to mid-2006. The traders, who made leveraged bets with margin accounts, were known for buying higher-yielding currencies on any sharp pull-back but then selling when such currencies rebound against the low-yielding yen.

The Japanese yen was traded at MUR. 25.54 as compared to MUR 25.79 last week.

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