The dollar started the week on a bearish note as investors’ eagerness to invest in dollar denominated assets faded. The Federal Reserve minutes of the November 1st meeting were marked by a concern from policy-makers to letting the US interest rates climbing too high. They believed that monetary accommodation would be removed in order to keep inflation under control. As such, future moves in the US interest rates would be increasingly sensitive to upcoming economic indicators. The market interpreted the minutes as being soft specially, as far as the characterization and the outlook for the policy were concerned.

Immediately, the dollar tumbled across the board, but came back stronger than before, flexing its inflation-busting muscles as investors rethought their investing strategies comparing interest rates differentials on both sides of the Atlantic. As liquidity started to thin out ahead of the US thanksgiving holiday, trading became choppy causing sharp moves in the currencies. Traders started to square their positions augmenting the US dollar strength. Later in the week, despite some poor data from the University of Michigan final consumer sentiment reading for November and softer than expected job markets, spreads were moving in favor of the dollar.

<B>UK interest rates steady</B>

The market would expect the European Central Bank to increase the euro interest rates by 25 basis points by the end of the week. As such we could expect some reshuffling of long dollar positions by traders magnified by US investment firms taking profits before year-end. The US benchmark federal funds rate is currently at 4 percent well above the 2 percent rate in the euro zone. Jean Claude Trichet, the ECB president, had underscored the intention of the ECB council to raise rates; however, the US Federal Reserve is also expected to raise rates further.

Against the Mauritian rupee, the dollar was trading at MUR 30.7565 yesterday compared to MUR 30.7011 a week earlier. The pound moved to the whims and caprices of the US dollar despite a unanimous vote from the Bank of England policy makers to keep UK’s interest rates steady. Actually, all the nine members of the Bank of England’s Monetary Policy Committee voted to hold UK’s interest rates at 4.5 percent. Furthermore, comments from MPC member, David Walton, reinforced the expectation that borrowing costs in the UK was unlikely to fall. Hence, giving a boost to a battered currency.

However, the market analysts did not expect the woes of the Sterling to be ending soon. Interest rates differentials between the Pound and both the US dollar and the Euro were expected to narrow down. Consequently, investors felt less likely to go long Sterling despite fairly hawkish comments from MPC.

Against the Mauritian rupee, the Sterling was trading at MUR 53.13 yesterday as compared with MUR 52.79 a week earlier

The yen failed to take advantage of the rise in the Nikkei stock average as foreign investors purchased Japanese stocks. This increase in demand for the yen was outweighed by Japanese insatiable appetite to buy foreign denominated bonds. However, yesterday, the yen rallied as the US dollar failed to clear key resistance above the 120 yen level. This provided an excellent bargain for Japanese speculators and importers who helped to stem the dollar slide.

Against the Mauritian rupee, the yen was trading at MUR 25.96 as compared with MUR 25.93 a week earlier.

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

■ <B>Today 30 Nov</B> EZ GDP Q3

US Mortgage Indx, GDP Prelim, Chicago PMI

■ <B>Thursday 01 Dec </B> EZ ECB rates US Jobless claims

■ <B>Tuesday 06 Dec </B> US Redbook, Durables gds UK Ind prod, Mfg.

<B>Vassan CALEEMOOTOO

Contributed by HSBC</B>