Battle raged on between the bulls and the bears pushing the European currency’s pulse to a stand still for the whole of last week against the dollar. The cooling down of the US economy and the slew of mixed data revived the specter that the Federal Reserve next move might well be a cut.

The sharp decline in July sales, one of the worst since March 2006, pressured the greenback enormously despite a temporary relief as home sales data showed that new homes found more owners than the market initially expected. Home sales data did spin the dollar in the right direction as the US currency retraced it gains against the euro. But then things started to get sour for the greenback, especially after other data such as the August orders for big-ticket durable goods, e.g. computers and other appliances came out dovish. Hawkish tone on inflation from the European Central Bank’s governing council members, Axel Weber and Nicholas Garganas, gave clues that more interest rates hike were needed in the euro zone. Immediately, volatility was injected into the sedated euro-dollar exchange rate. The euro popped up and tested $1.2874 range well above solid euro support level at $ 1.2650.

For the rest of the week, euro-dollar trading was ranged bound as the European currency failed to get traction from the rising euro zone interest rates. On the other hand, investors shrugged off backward-looking data portraying the US economy having grown at a rate of 2.6 percent per annum. The release of US consumer data did buoy the dollar for a while putting it on track to end the last quarter of the year near the upper band. Many had predicted a slowdown in the US economy and a cooling housing market would press-gang the FED to cut rates. However, analysts were confounded with a two-month high dollar against the euro while both housing data and US bond yield had dropped. The US dollar traded at MUR 32.733 yesterday, as opposed to MUR 32.713 last week.

Another hike of British interest rate

Sterling, the fashionable currency, buoyed when after the Bank of England’s Deputy governor Sir John Gieve stated in the Financial Times that he was thinking of another hike in the UK’s interest rate at the policy meeting this month. The thirst for yield kept investors aggressively hunting down high yielding currencies. However, another BoE policy member, David Blanchflower pour cold water on the heated market when he stated that inflationary expectations leveled off, that the labor market was set for a slump and that the economy had more excess capacity than previously reported. Definitely, Blanchflower displayed a gloomy backdrop for the UK’s economy and supported the British Central Bank in keeping interest rates on hold. The pound lost hold after the quarterly growth in April to June was unexpectedly revised down to 0.7 percent.

Furthermore, the implied GDP deflator at market prices was also revised down to 2.2 percent. Sterling was also unsettled after the Financial Times stated concerns over the possibility of another rate hike after the discovery of an error in Office for National Statistics figures related to cash value of national income. The Sterling was traded at MUR 62.79 as against MUR 63.24 last week.

The Japanese yen moved partly with the ebb and flow of technical trading and the comments from Japan’s new Finance Minister Koji Omi. The yen pulled out from record lows against the dollar when traders started to cover their short positions. Toward the end of the week, many traders believed that the covering of short positions were mostly done and that the low yield would continue to dog the yen. On the other hand, Omi cranked up the yen when he stated that the yen exchange against other major currencies were too volatile. He also added in another interview that Japan was officially out of deflation. The yen was sold at MUR 28.39 as compared to MUR 28.68 last week.

Major data/events this week

■ Wednesday 04 Oct : US mortgage, Durable

EZ retail sales

■ Thursday 05 Oct :

ECB rate

US jobless Claims

■ Monday 09 Oct : GB PPI

■ Tuesday 10 Oct : US Redbook, Fed Budget

EZ GDP

Vassan CALEEMOOTOO HSBC Mauritius Treasury and Capital Markets