The focus last week in the currency market was on Federal Reserve Chairman Alan Greenspan?s semi-annual testimony to the US Congress on the state of the US economy. Currency traders were reluctant to trade aggressively ahead of Greenspan?s speech due last Wednesday, preferring to wait for any clues on the future trend of the dollar from possible comments on the US trade deficit and the pace of future US interest rate hikes.

Any upbeat comment on the US trade deficit and/or a possible acceleration in the pace of future US interest rate hikes would usually benefit the dollar. Higher US interest rates compared to those in Europe and Asia would usually fuel investor demand for the greenback to the detriment of the other main currencies by making dollar-denominated assets more attractive.

However, Greenpan?s speech disappointed the market by failing to boost expectations of a widening of the interest rate differential in favour of the US. The Federal Reserve Chairman reiterated that US interest rates remained ?fairly low?, a signal that they will keep rising but which left potential dollar buyers disappointed over a possible acceleration in US interest rate hikes.

Actually, the euro had crosssed the USD1.3200 level at time of writing yesterday as the market was still focusing on US inflation data due for release today. The main catalyst was that central banks were shifting their reserves out of dollar assets. South Korea?s central bank said on Monday it planned to diversify its reserves (the world?s fourth largest) into a greater variety of currencies. Reserves have traditionally been held in USD. Adding to the momentum, central banks of both Korea and Taiwan withdrew bids for the dollar in Asian trading.

Against the MUR, the euro gained 58 cents over a week to trade at 38.18 yesterday. The USD edged marginally up to MUR 29.02 from 28.98 a week earlier.

The sterling ended the past week at a seven-week high against the dollar, trading above the 1.9050 USD mark yesterday on purchases of higher-yielding currencies. UK based rates stand at 4.75 % against 2.50 % in the US and 2.0 % in the euro zone. The pound had been pressured at the beginning of last week by dovish comments in the Bank of England quarterly inflation report. The report stated that growth and inflation risks were somewhat to the downside, which signalled that the Bank of England was in no hurry to hike UK interest rates.

Against the MUR, the sterling gained 57 cents to trade at 55.28 yesterday.

The Japanese yen gained 17 cents per 100 yen over the past week, edging up to MUR 27.84 (per 100 yen). The Japanese currency benefited from a number of positive factors, namely comments from North Korea?s leader Kim Jong-il on Tuesday that his country would return to talks on nuclear disarmament as well as sales of euro/yen. The concerns over Asian central banks diversifying out of the dollar also helped the yen.

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

■ <B>Wednesday 23 Feb</B>

German IFO survey, US mortgage and CPI

■<B> Thursday 24 Feb</B>

US durable goods and manufacturing, Japan CPI

■<B>Friday 25 Feb</B>

US GDP, inflation and housing; UK GDP; French industry

survey

■<B>Monday 28 Feb</B>

EU consumer and industry survey; US inflation, consumption, personal income, manufacturing and housing

■<B>Tuesday 01 Mar</B>

German unemployment; UK manufacturing; EU unemployment

<B>Contribution by HSBC</B>