The dollar nosedived on Monday morning in New York in technically-driven trades, with traders citing huge euro buy orders from hedge funds. The euro ascent was thought to have been triggered by a German and Swiss Fund which together were thought to have purchased some euro 3 to 4 billion against the dollar in New York on Monday. The flows were thought to be related to Alcan?s purchase of the French company Pechiney.

As the dollar fell, momentum traders also sold dollars taking the euro to fresh three-month highs of $1.16. The greenback has had a tough week since the G7?s call for more flexible exchange rates. The dollar plunge was apparent first and foremost against the yen, but its losses spilled across the board against a flurry of other currencies, including the single currency.

Several officials did attempt to test dollar shorts, but to no avail. The National Association of Manufacturers, which was thought to have lobbied heavily against Asian currency manipulation, said it was not looking for a sudden RMB (Chinese Renminbi) float but rather a slow relaxation of the regime. Meanwhile, the US Commerce Department said the G7 statement was aimed at Japan and China.

Sentiment towards the dollar remains fragile as the G7 statement is nearly universally seen as signalling a resumption of the dollar?s underlying downtrend. Fundamentals wise, the dollar has yet to prove its economy is on a steady recovery trail. An unexpected fall in durable goods orders failed to take the euro through 1.1533 on Thursday. That said, better than expected jobless claims did not precipitate a break of 1.1480 support.

Investors will keenly eye this Wednesday?s key manufacturing survey from the Institute for Supply Management and Friday?s employment report for further clues on the US economy. Against the Mauritian rupee, the common currency was trading at MUR 33.62 as compared to MUR 33.55 a week earlier.

The yen firmed on Tuesday morning, with markets bracing for Wednesday?s release of the Bank of Japan?s (BOJ) quarterly ?tankan? business sentiment survey, which could show its headline index cross the neutral zero level for the first time in almost three years. Last time?s strong reading in the tankan report was seen as a major driver of foreign investment into Japanese shares, which took the Nikkei average above the psychological 10,000 mark not seen for years. The yen has been bullish over the week, hitting three-year highs against the dollar in the wake of the G7 statement in Dubai for a move towards more currency flexibility.

The G7 statement, which endorsed flexible currency regimes, was seen as implicitly aimed at Japan and China. Lack of signs of intervention by the Japanese authorities heartened yen bulls to push the currency even higher. Analysts said the situation reminisces of 1999?s plunge of the dollar to 101 yen. In 1999, foreign investors spent some 11 trillion yen ($97.93 billion) in Japanese shares, pushing up the Nikkei and the yen. In the same year, Japan spent some 7.6 trillion yen ($67.66 billion) in yen-selling intervention, but the yen failed to withdraw against the dollar. Yesterday, the Japanese currency was offered at MUR 26.12 as compared to MUR 26.15 on last Tuesday.

Sterling recouped its losses on Tuesday afternoon, shrugging away lacklustre consumer data and concerns over domestic political wranglings. Influential research company Martin Hamblin Gfk?s consumer confidence barometer came in lower than expected for the second month running whilst other data showed a slow down in mortgage lending and consumer credit.

However, sterling recovered on Monday afternoon, taking its cue from the dollar?s misfortunes. Also supporting the British currency is speculation regarding the interest rate outlook. Analysts predict the UK will be amongst the first G7 countries to hike interest rates, based on a string of recent upbeat data and also hawkish comments from the Bank of England earlier this month. Yesterday, the pound was trading at MUR 48.32 as against MUR 48.21 on last Tuesday.

Contribution by HSBC