The dollar surged to new levels last week as mounting expectations ran like wild fire amongst the dried bush that the US Federal Reserve bank would hike up interest rates in the US more times than what the market had originally forecasted. Currency and commodity markets, on the other hand, pointed out a different scenario altogether, predicting that the Federal Reserve might be nearing its tightening cycle.

In combating inflationary pressures, the US central bank raised borrowing costs 16 consecutive times, by 25 basis points increments, since June 2004. With the current Fed funds rate at 5 percent, the market had already priced in a similar increase at this week’s policy meeting, and showed about 80 percent chance of another move in August.

Currency and commodity markets were speaking the same language stating that the FED would continue in its tightening campaign a few more times, but the peak would be sooner than what many key market players were anticipating. Actually, economists tend to agree that the FED was pretty successful in containing inflation insofar. However, the market remained alert to signs of how early would the tightening campaign be stopped. In a speech, Fed Chairman Ben Bernanke stated that, aside from looking at inflation data, FED officials would analyze asset prices when defining monetary policy. In the past, commodities and currencies markets had given more reliable guidelines to the US Federal monetary policy committee than even economic data.

However, many analysts concurred that the effects of monetary policy upon the economy and inflation were often delayed. In other words, a tight policy might have been implemented six months ago before its effects could be felt.

On the other hand, even the perception of a change in monetary policy or a shift in liquidity affects commodities and currencies in real time. However, market players still believed that the exhortation for the Fed when it came to monetary policy would still be inflation. Consequently, the FED would monitor the vehicles that allowed it to gauge inflation, such as the consumer price index and producer prices.

The US dollar traded at MUR 30.99 yesterday </B>