Recent economic indicators signalled that the recovery of the world largest economy was running out of steam prompting the market to scale back any expectation of a rise in the interest rate in the near future. This negative sentiment caused some major dollar sell-off and the greenback mired near multi-month lows against the Euro and the Sterling on Monday. The dollar fell to US$ 1.2461 to the Euro before rallying back to US$ 1.2418 toward the close of the Monday sessions. Last Friday?s economic indicators showed core inflation rate to be softer than expected and US retail sales and industrial production data to be very disappointing.

The degree of tightening in the US interest rate market along with the interest rate differential between the US and other countries would influence the market in the weeks to come especially ahead of Greenspan?s testimony to Congress on Tuesday and Wednesday.

Remote chance of rate hike

Greenspan is expected to favour growth while his approach might be dovish in regards to inflation. The moderation in June CPI data is causing the market to introduce minute chance that the Fed will not hike 25bp on August 10th. However, analysts believe that the chance the Fed will increase rate beyond 2 % is quite remote.

Against the Mauritian rupee, the dollar was offered yesterday at 28.51 against 28.54 a week earlier.

The Sterling leapt to its highest level against the dollar in nearly five months on Friday. Figures showed that the foreign appetite for US assets was on the decline causing the greenback to be knocked across the board. During the week the pound under-performed as concerns grew that a politically sensitive report over Britain pre-war intelligence on Iraq and two by-elections could destabilize the government. However, Prime Minister Tony Blair managed to come out of the situation in pretty good shape. Consequently, the Sterling became buoyant in recent week by its yield attraction relative to the Euro as investors expect the Bank of England to raise interest rates at least a few times before the year is over.

Rs 53 for a pound

Against the Mauritian rupee, the pound was offered yesterday at 53.17 against 53.01 a week earlier.

The yen slipped against the greenback mostly throughout the whole week. In fact, the Yen fell to a one-month lows against the dollar on Friday mainly the result of some robust US economic indicators and declining Japanese stock prices. However, the dollar swiftly shed its gains once the psychological barrier of 110 Yen to the dollar was achieved. In addition, the Yen felt less downward pressure as China?s second-quarter gross domestic product figures grew by 9.6 percent from last year. The GDP number, coupled with consumer price index, showed signs of easing inflation that soothed investors worries about draconian measures being taken by the Beijing authorities which could stifle the whole regional economy.

Against the Mauritian rupee, the yen was offered yesterday at 26.28 against 26.31 a week earlier.

Major events/data:

Wednesday 21

US Mortgage Indx

Thursday 22

Fr Con Spending

GB retail sls

Friday 23

GB GDP qq

Monday 26

EZ ECB C/A

Tuesday 27

US Redbook

<I>Contribution by HSBC</I>