Last week trading on currency market was dominated by Federal Reserve Chairman Alan Greenspan?s testimony to the Congress on the US economy and Fed policy. In the first leg of his testimony delivered on fifteen July on the state of the US economy, Greenspan gave a much more upbeat assessment than expected. For the second half of 2003, expected US real growth should be at 3.75% whilst for 2004 it should range from 3.75% to 4.75%. However, Greenspan did not mention anything about trying to flatten the longer end of the US yield curve.

Market was expecting yields to fall and bond prices to go up. Subsequently, his comments precipitated the largest fall in bond prices and rise in yields at the longer end of the yield curve. Just as the sharp decline in yields through June worked against the dollar, the subsequent rise in yields benefited the greenback. Therefore, the dual combination of upbeat report on US economy and rise in longer dated US yields pushed the dollar to a two-month high against the Euro.

However, a day after investors sent the dollar on a broad rally, the greenback relinquished all its gains. Failure by Greenspan to shed new light on the direction of the economy in his second leg of his testimony last Wednesday was cited as the main factor. Dollar was also hurt after US consumer sentiment fell short of investors? expectations despite showing strength in July. Falling US stocks overriding positive US data kept the dollar further on the back foot.

Against the Mauritian rupee, the common currency was trading at MUR 33.79 as compared with MUR 32.53 a week earlier.

Over the week, the dollar firmed against the Japanese currency, drawing support from alleged Bank of Japan intervention last Tuesday. For the time being the downside is firmly supported by strong commitment by the authorities to restrain the rise in the yen. Japan?s efforts got unexpected backing from US Treasury Secretary John Snow. However, the sizeable net inflows reflecting the sale of foreign bonds by Japanese investors, as well as foreign investors interest in Japanese equities over the last four weeks seem to point to the herculean effort the Bank of Japan will have to deploy to prevent the yen from strengthening.

Yesterday, the Japanese currency was offered at MUR 25.10 as compared to MUR 25.36 last Tuesday.

Sterling slid to three month low against the dollar on uncertainty over the political fall out from the apparent suicide of a British scientist, as well as the political row over the justification of war with Iraq. Concern over the prospect of further UK interest rate cuts had already put the pound under broad-based pressure, as the market was of the view that the 25 basis points cut on 10th July was unlikely to be the last in the current easing cycle. In this connection, release today of Bank of England minutes should provide clues whether another rate cut is imminent.

Yesterday, the pound was trading at MUR 47.71 as against MUR 47.98 last Tuesday.

Major data/events this week:

-Wednesday 23 July

• Thursday 24 July

? UK Retail Sales and US Jobless Claims

• Friday 25 July

? US Durable goods

• Monday 28 July

? German IFO

• Tuesday 29 July

? Eurozone Balance of Payments

? US Redbook &US Consumer Confidence

? Japanese Industrial Output

Contribution

by HSBC