The wobbling dollar got revitalized in highly volatile trading sessions, last week, as it tracked sharp rebound in US equities. Global financial markets were shaken to their very roots by successive waves of risk aversion spawned by concerns over the state of credit markets from across the world. As tribulations flared in the high-risk US subprime mortgage sector, spooked investors fled fearing global credit market meltdown.

All did not start well for the greenback, which took a blow when data from the Institute for Supply Management indicated that key-manufacturing index was lower than expected. In addition, the US economy added only 48,000 jobs in July, below the median forecast of 100,000. Investors had so far nothing to hang on to and were focused on the US credit and housing markets as both markets took successive hits. According to news reports, the latest victims were the US mortgage lender, American Home Mortgage Investment Corp and two Australian funds. Both US and European shares were battered after the Home Mortgage Investment stated that it could no longer fund home loans and might have to liquidate assets.

The dollar picked itself off the ground as US blue-chip stocks rallied. The US currency kept its composure as the European Central Bank left euro zone?s interest rates unchanged at 4.0 percent. On the other hand, the euro slid despite ECB president, Jean-Claude Trichet, stated that the central bank would be deploying ?strong vigilance?? to stem inflation risks; hence giving cues that interest rates in the euro zone might go up in September. Trichet also added that the ECB would be monitoring closely shifts in sentiment and price movements that were part of ?normalization of pricing risk??.

The high flying dollar lost steam towards the end of the week as it got his breath knock out when Bear Stearns, CFO Sam Molinaro, commented that fixed-income markets were the worst than in the past two decades. According to Molinaro, the credit turmoil and risk aversion might be the worse predicament than the 1980?s stock market plunged and the Internet bubble bust.

The US dollar traded at MUR 31.57 yesterday compared to MUR 31.782 last week.

Sterling was seen with favorable eyes by investors due to its high yields and as a safe haven from the turmoil in the US credit market. Financial markets in the UK were stable, propelling the pound to new levels against the greenback. Lower implied currency option volatility, narrowing credit spreads, and rising stocks, encouraged currency traders to go long cable. Just like a gentle breeze that swept across the savanna, the Confederation of British Industry reported stronger-than-expected retail sales growth in July. The pound also got a boost from expectation of an interest rate hike by the Bank of England this week. However, the BoE did keep UK?s interest rates on hold but analysts believed that interest rates would go up to 6.0 percent by year-end. Sterling did come under pressure, towards the end of the week, on heightened risk aversion that triggered the unwinding of carry trades. In carry trades, investors borrowed low yielding currencies like the yen to fund the purchase of high-yielding currencies like the pound.

The Sterling was traded at MUR.64.14 as against MUR 64.59 last week

The yen hovered near a three-month high against the dollar on fears of deterioration in US credit markets and a fall in US equities pushing traders to unwind yen carry trades. According to analysts, the yen reacted to the fall in US share prices after American Home Mortgage Investment Corp stated that it could no longer fund home loans and might have to liquidate assets. In addition, Japanese investors had also taken advantage of low yen exchange rates against other currencies to square up their positions.

The yen was sold at MUR 26.61 as compared to MUR 26.73 last week.

Major data-events this week :

● Wednesday 08 August:

US Mortgage index

● Thursday 09 August:

US Jobless claims

GB Trade

● Friday 10 August:

US FED Budget

● Monday 13 August:

US Ret Sls

GB PPI

● Tuesday 14 August :

GB CPI yy

EZ Foreign trade

Vassan CALEEMOOTOO HSBC Mauritius Treasury and Capital Markets