The American green back passed through a very bad patch in last week’s trading session. It started with the Democrats gaining control of US House of Representatives for the first time in more than a decade. They also won the Senate in the US mid term congressional elections held last week.

Furthermore, the news that China had clear plans to diversify its huge $ 1 trillion foreign currency Reserve funds shook the already wobbling dollar. It is estimated that 70 percent of it’s reserve is in US treasuries. This added fuel to the already cooking plans of other Centrals Banks, for example the Russian and the Swiss to diversify their holdings into the Japanese and the Emerging markets.

The impact of diversification of foreign currency reserve funds by global central banks in light of the peak in US interest rates and the need to diversify into other currencies and commodities, pressurized the US dollar through out last week’s trading. Although the US trade deficit figures of $ 66 billion in September showed a slight improvement compared to the August figure of $69 billion, there were fears of it worsening if the other Central Banks try to pull out their reserve funds from the US treasuries.

However, the dollar got a small respite on Wednesday following tough talk on inflation from Chicago Federal Reserve President Michael Moskow, reiterating his view that more US interest rate hikes might be needed to combat inflation. The second factor that favored the US dollar was the resignation of Donald Rumsfeld as defence secretary of America. The Republicans had to bear the defense spending inspite of their traditional low spending platform. At the end of last week, dollar strengthened as investors looked for more valid information regarding the diversification of the global funds. The Euro dropped to a low of $1.2802 from a high of $1.2900 reached on Friday. The US dollar traded at MUR 33.156 yesterday as compared to MUR 33.046 last week.

Last week the Sterling pound see-sawed against the US dollar, climbing to 1-1/2 year high of $1.9180 before falling to a low of $1.8978. Initially the GBP rose with the market’s expectation of an interest rate hike on Thursday and the effects of a negative US dollar market sentiments. The National Institute of Economic and Social Research projected that Britain’s economy grew 0.7 percent in the three months to October compared with the previous three months. Data showed British house prices rose at their fastest annual rate of 8 percent in September. The UK economic fundamentals being good, as expected the Bank of England hiked the UK interest rates by 0.25 bps to 5.00% on Thursday the 9th of November 2006, but they did not give a clear future interest rate direction. This caused the Sterling Bulls to trim their long pound positions, bringing the Sterling considerably low. Until Monday the sterling/dollar remained one of the best performing currency pairs this year rising more than 10 percent since January 2006.

The Sterling weakened on Tuesday after the below forecast annual rate of inflation data at 2.4 percent compared to market expectation of 2.6 % hurting the market’s view of further UK interest rate hikes. The Sterling was traded at MUR.64.32 as against MUR 63.86 last week.

The Japanese Yen bounced back in last week’s trading, on the back of US dollar woes and the stance taken by the Bank of Japan to raise the interest rates slowly so as not to affect the carry trades(ie to borrow the low yielding currencies like the yen and invest in high yielding ones). Better than expected economic growth data also provided support to the Yen. The Japanese economy grew at a 2 percent annual rate in the third quarter, which is double the forecast figures. In addition to this the previous quarter’s growth rate had been revised to a 1.5 percent from 1.00 percent.

Furthermore the yen benefited from interest expressed by the Central Banks of Russia, Switzerland and United Arab Emirates to buy yen in order to diversify their reserve funds from the US dollars. The dollar traded at 117.81yen in late Tuesday trading session. The yen was sold at MUR 29.14 as compared to MUR 28.95 last week.

<B>HSBC Mauritius Treasury and Capital Markets</B>