Last week’s trading on the currency market saw the dollar gain ground for most of the week, hitting a three-month high of $ 1.1875, against the European single currency. Another round of comments from Federal Reserve officials suggesting that US interest rates were heading higher provided supported for the US currency.

The Federal Reserve’s repeated vow to keep raising US interest rates at a measured pace to limit the inflation fallout from soaring energy prices had helped to revive the dollar’s fortunes since early September.

The market was reminded of inflation risks by the Fed’s Beige Book, which showed that business activity cranked up in September and early October, but also that higher energy costs had pushed up prices. Markets widely see the Federal Reserve pushing US interest rates higher at its final two meetings this year, taking the Fed funds rate to 4.25 percent from the current 3.75 percent.

However, the dollar’s run was briefly kept in check after hawkish comments made by European Central Bank chief economist Otmar Issing.

Though European Central Bank chief economist said the euro zone interest rate outlook was unclear, his comment that central banks have to be “extremely vigilant” against inflation sparked speculation that the European central bank might raise interest rates sooner than later.

Issing’s warning came on toes of last month’s comments from ECB President Jean-Claude Trichet, which boosted the euro when he said the central bank had to use “strong vigilance” against inflation risks. Against the Mauritian rupee, the euro was trading at MUR 36.69 as compared to MUR 36.79 last week.

Over the week, the dollar edged towards a two-year high against the yen, trading near the 25-month high of around 116 yen, although the market was moving cautiously on concern that the pricing-in of further rises in US interest rates might have gone a bit too far.

The dollar’s inability to break above 116 yen might be an indication that the time might be ripe for a correction down to the mid-114 yen region, though a downward move was seen limited as investor demand for dollars remained high. However, the yen managed to cut its losses on back of comments by Japanese Finance Minister Sadakazu Tanigaki, who said speculative currency market moves were undesirable.

Cut borrowing costs

Yesterday, the Japanese currency was offered at MUR 26.62 as compared to previous Tuesday’s 26.68. Sterling firmed to two-week highs against the dollar after minutes of the Bank of England’s latest monetary policy meeting showed that an interest rate cut was not discussed. Market players had thought at least a few members of the bank’s Monetary Policy Committee would have presented a case to cut borrowing costs given recent signs of weak economic growth. Sterling also found further support after UK retail sales data released on last Thursday showed a larger than expected increase in September.

Yesterday, the pound was tra- ding at MUR 54.06 as compared to previous Tuesday’s 53.61.

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

■ <B> Thursday 27 Oct</B> US Durable Goods, US Jobless Claims

■ <B>Friday 28 Oct </B> Euro zone Consumer Sentiment, Euro zone Business Climate, US GDP

■ <B> Monday 31 Oct </B> US NAPM, US Chicago PMI

■ Tuesday 01 Nov </B> US Redbook, US Consumption Spending, US ISM Manufacturing, US Federal rate decision