Escalation of tensions in the standoff between Iran and the European world over Tehran?s nuclear program sparked oil prices while stock prices on Wall Street plummeted. In addition, comments from a top Federal Reserve official added nothing to quell the worries of investors when he commented that the US tightening cycle might be coming to an end.

Immediately, the dollar extended some losses and investors looked to the Swiss franc as a safe haven like in times of heightened geopolitical concerns.Market talks suggested that the Iranian government might curtail its crude oil exports as a means to curb pressures on its nuclear program. Iran might face referral to the United Nations Security Council for possible sanctions, as the european world suspected that its nuclear plants were mainly designed for the manufacture of weapons.

In addition, rumors had it that Iran had started to transfer funds away in an attempt to preempt possible UN sanctions. This news spooked investors who pondered as to the destination of those funds and the various ways financial market would react. The situation in the Middle East spurred a rally in the price of oil causing the latter to surge to above $ 68 a barrel. A rise in oil prices put the focus on slower economic growth and crimp consumer spending on goods and services other than gas and fuel.

Sterling outperforms dollar

Furthermore, the dollar breached key technical levels and extended its losses after Richmond Federal President Jeffrey Lacker, a voting member of he US Central Bank?s policy committee member, stated that only one more interest rate move would be left, after an 18-month tightening campaign.

The market interpreted that comment as being bearish as the interest rate hike was already priced in. Rising US interest rates were considered to be the driving force behind dollar strength since they potentially drew foreign funds into dollar-denominated assets.

Against the Mauritian rupee, the dollar was trading at MUR 30.798, same as a week earlier.The sterling benefited from risk-averse investors to overcome a vulnerable dollar ridden by geopolitical and structural problems. In fact, spooked investors poured onto the British equity markets, rich in pharmaceutical and oil companies.

In addition, robust UK retail sales and mortgage data dented any expectation that the Bank of England might cut interest rates in the short-term. Retail sales had been on a constant rise and climbed 0.4 percent in December.

Underlying British mortgage lending showed an aggressive increase in December indicating that the housing market was oscillating in a firm direction. However, trading was relatively lackluster with dealers finding it more interesting to watch a little whale that swam up the River Thames. Against the Mauritian rupee, the Sterling was trading at MUR 55.18 yesterday as compared with MUR 54.62 a week earlier.

Livedoor effect spooked investors

The yen got smacked upside the head and fell as the Japanese stock prices tumbled for two consecutive days and encouraged foreign investors to sell out shares of stock on the Japanese Nikkei index. In fact, the Nikkei fell almost 6 percent since prosecutors launched a raid in the office of high-profile Japanese portal operator Livedoor Co Monday on suspicion of securities violations.

The market then placed a laser-like focus on the Japanese bourse and falling stocks were somehow equated to yen weakness. However, the yen recovered as the Japanese stock prices rebounded. The Nikkei average rose by 2.5 percent after the slide of more than 5 percent in the previous two days. As the Nikkei rallied, foreign investors? worries eased and the yen rose roughly to the 114-116 yen range. Against the Mauritian rupee, the yen was trading at MUR 26.99 as compared with MUR 26.96 a week earlier.

Major data/events this week:

■ Wednesday 25 Jan ? US Redbook

■ Thursday 26 Jan ? US Mortgage Indx ? JP BOJ Minutes ? GB GDP

■ Friday 27 Jan ? US Durable Gds, Jobless claims

■ Tuesday 31 Jan ? US Redbook, FED Rate, Chicago PMI ? EZ Business confidence

Vassan CALEEMOOTOO Contributed by HSBC