Slowly life was pumped up in the cataleptic dollar as it regained some of its composures against the euro. A combination of technically-driven trades, robust US economic indicators, and bullish comments from the Treasury secretary on the Chinese Yuan served as cataplasm to the badly beaten greenback. All of it started when the November service sector activity data indicated a rise as opposed to a much-anticipated fall. The two-week US dollar free fall was finally capped.

The rest of the week showed the dollar unmoved against the euro despite the European Central Bank lift euro zone borrowing costs to 3.5 percent. The tug of war between the dollar and the European common currency continued but ECB president, Jean-Claude Trichet, poured cold water on hot euro bulls when he stated that interest rates would remain ??low?? in the euro zone and that the central bank would be monitoring any developments ??very closely??. In addition, Trichet commented that inflation would most likely eased in 2007, mostly due to falling oil prices. The ECB Chairman spooked all those who were looking forward for clues about the future path of the euro interest rates and stated that it would be ?wrong?? to assume that there would be a hike at the meeting in February.

Toward the end of the week, the US currency rallied when data released showed that the US economy added 132,000 jobs in November. Immediately, a flurry of dollar buying started. Treasury Secretary Henry Paulson added to the momentum by saying that China needed more foreign exchange flexibility. Against the Mauritian rupee, the dollar was trading at MUR 33.368 compared to MUR 33.328 last week.

Sterling went downhill throughout most of last week trading sessions. However, the pound still remained the best performing currency this year. The pound rose briefly after the Chancellor of the Exchequer Gordon Brown said that the UK economy would grow 2.75 in 2006 beating forecast of 2.0 percent. But Sterling retreated after a series of dovish UK?s data. Manufacturing output fell 0.4 percent against the expected 0.2 percent rise. Industrial production dropped 0.8 percent on the month against a forecast 0.1 percent gain.

British interest rates heid constant

Despite the Bank of England held the interest rates constant, analysts still believe that the direction of its next move was still uncertain. The monetary policy debate raged on and centered on the February 2007 meeting and the next inflation report. Against the Mauritian rupee, the Sterling was trading at MUR 67.32 yesterday as compared with MUR 66.91 a week earlier.

The yen remained well supported despite the Bank of Japan Policy Board member Kiyohiko Nishimura who said that current economic conditions in Japan were quite uncertain. He added that the outlook in Japan was mainly hampered by slow growth in personal conssumption. However, another member of the BoJ, Atsushi Mizuno, indicated that strong economic indicators were not necessarily the prerequisite for raising rates. This was interpreted by investors as a signal that Japanese rates of interest would rise in the near future. The yen was sold at MUR 29.56 as compared to MUR 29.90 last week.

Major data/events this week :

■ Wednesday 13 Dec : US Mortgage Indx

■ Thursday 14 Dec : US jobless Claims

■ Friday 15 Dec : US CPI, Cap Net Flows

■ Monday 18 Dec: JP BoJ meeting

■ Tuesday 19 Dec: JP BoJ rate

Vassan Caleemootoo

Contributed by HSBC (Part 2)