The mantra last week was fixated on selling the dollar and testing the minimum level to which the dollar could fall. With no surprise the dollar staged a fall as risk – aversion whetted investors sentiment for dollar-denominated assets who rushed into commodities markets.

Negative sentiments plagued the US currency after data on US housing and producer inflation fuelled concerns among market participant that interest rates in the US might be peaking. Producer prices excluding food and energy rose by a meager 0.1 percent last month, way below forecast while April housing starts came in at 1.849million unit compared to analyst’s expectation of 1.95 million. However, the US dollar rallied on Wednesday when the French Finance Minister Thierry Breton spooked euro bulls by saying that ‘’everything’’ ought to be done to keep the euro competitive against the greenback. Despite Breton had no hand in shaping the euro zone monetary policy, his remarks were interpreted as an open salvo in official jawboning to curb the dollar fall since the Group of Seven Finance Ministers commented that Asian currencies should appreciate to stem global imbalances. At the same time high volatility in emerging markets and declines in demand for commodities such as gold and oil also gave solace to a weak dollar.

However, all supports broke loose after the US treasury secretary John Snow reiterated his dissatisfaction about the pace at which China is liberalizing its currency regime. According to analysts, Snow’s comments were tacit acceptance on the part of US officials for a decline in the US currency to help correct global imbalances.

The greenback recovered towards the end of the week as investors moved capital out of commodities into safe haven assets such as US Treasuries. In addition, traders also started to unwind short dollar positions that in some cases had reached extreme levels.

The US dollar traded at MUR 30.98 yesterday same as last week.

The Japanese yen started the week on a strong footing against the US dollar after tame inflation and housing figures provided indications that the Federal Reserve might end the US interest rate hike. In fact, Japanese exporters stepping in and selling the dollar gave sound support to an already strong yen. However, the yen rally lost momentum as investors felt that the dollar’s sell-off in the past month might have gone far enough. Investors started shifting money back into US assets from commodities such gold and oil. The yen is at MUR 28.06 as compared to MUR 28.43 last week.

The Sterling rose against the dollar as the latter succumbed across the board due to disappointing data and negative sentiments. A rebound in UK’s house prices together with a string of robust data fuelled a rally in the pound and raised expectation that the next move in UK’s interest rates would be up. Although many analysts concurred that the Bank of England would not rush headlong into a tightening campaign raising UK’s interest rates from the current 4.50 percent, they nevertheless felt that the market would be more comfortable with an implied tightening bias as opposed to a rate cut. This expectation was later confirmed when one of the Bank of England’s Monetary Policy Committee meeting showed that David Walton voted for a rate hike. Towards the end of the week, news of mergers and acquisitions pressured the pound downwards. Associated British Foods said on Friday that it had agreed to buy 51 percent of Africa’s biggest sugar producer, Illovo for 317 million pound in cash. A brief respite, however, came for the Sterling as French Bank Credit Agricole said that it was considering a bid for British Bank Alliance and Leicester.

The Sterling was traded at MUR.58.71 as against MUR 58.87 last week.

<B>Vassan Caleemootoo

HSBC Mauritius Treasury and Capital Markets</B>

<B>MAJOR DATA/EVENTS THIS WEEK</B>

Wednesday 24 May : US Mortgage index and Durable Gds.

Thursday 25 May : US Core Pce, Jobless Clms.

Friday 26 May : Michigan Prelim

Monday 29 May: EZ ECB

Tuesday 30 May : US Cons Conf’ce