The dollar rallied against the euro and other major currencies in last week’s trading. The dollar rose as high as $1.2484 against the EUR last Thursday, hitting a near three month high and breaking the psychological level of $1.2500. A combination of robust US retail sales, and revisions to US payrolls from last week provided fuel for dollar bulls. Furthermore, the rise in the consumer price index rekindled market expectation that the US economy may not be slowing down but would keep an upward pressure on inflation, raising hopes of another US interest rate hike by the end of 2006 instead of an interest rate cut in the near future. The dollar was also supported by geopolitical fears from media news from the US intelligence as to the possibilities of another nuclear test by North Korea. US intelligence later confirmed that Pyongyang had conducted an underground nuclear test.

In the coming days, strict watch on crucial inflation figures, US producer price index for September, as well as investors funds inflow into US will provide further clues as to the direction of the dollar. On a technical level, there is a considerable number of sell orders of euros placed around $1.2480, and a breach of this key level could again send the US currency to new high.

The US dollar traded at MUR 32.945 yesterday, as opposed to MUR 32.864 last week.

The pound sterling had a roller-coaster ride in last week’s trading due to the initial influence of a strong US dollar followed by various positive UK inflationary data. The Sterling rose against the dollar to $1.8678 yesterday from a two and a half month low of $1.8516 on Thursday last. The pound appreciated on the back of stronger than expected UK housing data and consumer price index which in turn cemented the market view for another UK interest rate hike in November. The Sterling was traded at MUR 62.42 as against MUR 62.37 last week.

The yen had a rough ride against the dollar, as concerns arising from North Korea nuclear testing, coupled with the Bank of Japan decision to raise yen interest rates only gradually dented the Japanese currency performance. However, yen losses were kept in check after comments by Russia’s first deputy central bank chairman, Alexel Ulyukayev, that they would be increasing their reserves in Yen considerably. The Japanese Finance Minister Koji Omi welcomed this positive move by the Russian Government. The yen was sold at MUR 28. 24 as compared to MUR 28.13 last week.

<B>Wednesday 18 Oct : </B> US mortgage, US CPI, JP BOJ minutes.

Thursday 19 Oct :</B> US Jobless claims, GB Retail.