Last week trading on the currency market saw the dollar drifting within striking distance of a 13-month high against the European single currency, as the market stayed focused on the US currency’s widening interest rate advantage over its major rivals.

The dollar was still basking in the glow of US Federal Reserve interest rate hike. The US Federal Reserve lifted interest rates by a quarter percentage point on last Thursday to 3.25 percent and repeated it would keep moving its accommodative interest rate policy at a measured pace. Despite some recent signs of US economic softness, due partly to high oil prices, the US Federal action pointed to some concern about inflation and suggested that more tightening might be in store.

This marked the ninth US interest rate increase since last June. However, dollar gains were kept in check after data showed euro zone manufacturing contracted at a slower rate in June, and euro zone unemployment dropped in May to 8.8 percent.

Furthermore, euro also found some support after uncertainty about the political situation in Germany was removed. On last Friday German Chancellor Gerhard Schroeder lost a vote of confidence in parliament, paving the way for a dissolution of parliament and an early election.

Against the Mauritian rupee, the euro was trading at MUR 35.42 as compared to 36.08 MUR last week.

Over the week, the dollar advanced to a ten-month high against the Japanese currency, benefiting from a widening interest rate differential in favour of the greenback. By contrast to nine successive rises in US interest rates, the key rate in Japan has been held at almost zero percent for more than four years.

<B>Ultra-easy monetary policy</B>

Bank of Japan has pledged to keep its ultra-easy monetary policy until consumer prices inflation stabilised above zero.Yesterday, the Japanese currency was offered at MUR 26.71 as compared to previous Tuesday’s 27.15.

The sterling fell to a 14-month low against the dollar after the US Federal Reserve raised interest rates by 25 basis points to 3.25 percent, signaling more to come. A recent run of weak UK data had fuelled expectations for a near-term UK interest rate cut in the cost of borrowing, which many analysts predicted could come later in the year. So far, the Bank of England has kept UK interest rates unchanged at 4.75 percent. Yesterday, the pound was trading at MUR 52.31 as against MUR 54.15 Tuesday before.

<B>Contribution by HSBC</B>