The dollar rose on Monday on position-squaring ahead of this week?s heavy slate of data, including this Tuesday?s Federal Reserve policy meeting. Data expected this week include retail sales, trade, industrial production and the University of Michigan consumer sentiment index. No rate change is expected from the FOMC meeting but investors will eagerly focus on Alan Greenspan?s review of the US economy, especially the balance of risk and outlook for the bond market.

The dollar?s fate was closely tied to US Treasuries refunding last week as investors watched the results for 10-year, 5-year and 3-year treasury securities auctions. After falling on Tuesday in the wake of a poorly-received 3-year auction, the dollar soared back following satisfactory results for the longer-dated instruments on the next consecutive days. US bonds and equities rallied on the later auctions, with the shorter-term bond futures recouping Tuesday?s loss. The refunding of Treasuries is crucial vis-à-vis the US current account deficit which currently stands at a gaping 5 pct of Gross Domestic Product (GDP).

Analysts? estimates show that to bridge the current account gap, the US needs to attract at least $ 1.5 billion in foreign funds per day. One way of closing the gap would be through a forceful depreciation of the dollar so as to cheapen and increase US exports, thereby offsetting the deficit. The increasing deficit has for a long time cast a shadow over the dollar and thus investors are sensitive to deficit data moving either way. Against the Mauritian rupee, the common currency was trading at MUR 33.32 as compared with MUR 33.61 a week earlier.

The yen rose against the dollar on Tuesday morning in Asia after second-quarter GDP rose by 0.6 pct, as opposed to a market consensus of 0.2 pct. Besides the upbeat growth figures, a number of trading factors seemed to be behind the yen?s recent rally. Firstly, Japanese investors were expected to repatriate part of the $75 billion in coupon payments and redemption from US Treasuries falling due this week. Secondly, official portfolio flow data showed Japanese investors were net sellers of foreign bonds in July. Investors sold 2.51 trillion yen of foreign bonds, compared to net purchases of 101.5 billion yen in June.

Foreign investors were also large net buyers of Japanese equities, amounting to 1.7 trillion yen, which correlates to consistent gains in the Nikkei stock exchange over July. Thirdly, there were also rumors in the market that Brazil was buying yen in the spot market to repay a Samurai bond worth 200 billion yen or $1.68 billion maturing on August 28. Given the rally, over the recent days of the yen, Japanese authorities have stepped up threats of intervention to sell yen in the market so as to curb its rise. Data showed that, by the end of July, Japan?s yen-selling intervention had hit an annual record of around 9 trillion yen ($75.59 billion), exceeding the previous high of 7.6411 trillion yen set in 1999. Yesterday, the Japanese currency was offered at MUR 24.77 as compared to MUR 24.64 on last Tuesday.

On late Monday Sterling trailed the euro higher against the dollar in early New York trades, shrugging aside UK producer price prices which rose ahead expectations in July. Nevertheless, UK trade deficit which widened to 4.5 billion pounds in June, highlights weaker exports. Earlier, in a widely-anticipated move, the Bank of England left interest rates steady at a 48-year low of 3.5 pct on Thursday following record consumer debt and signs that the economy may be recovering.

Contribution by hsbc