Tumbling global stock prices… soft US economic data… and growing geopolitical tensions with Iran jolted investors from complacency, sparking wide sell-off in the dollar. The US currency seemed to have lost its usual shine as a safe haven for investors.

The biggest day fall in Chinese stocks prices last Tuesday spooked investors and heightened nervousness especially concerning carry trades. According to analysts, unwinding of carry trades was more likely to benefit low-yielding currencies such as the yen and Swedish crown. As investors’ aversion for risks increased, emerging stock markets fell sharply and US Treasury bond yields fell for the third straight sessions as some investors fled for peaceful fixed income yield.

The US currency got a breather as sales of US existing homes rose faster than expected in January and consumer confidence edged higher in February. Investors were more focused, however, on earlier data that showed durable goods orders, a key gauge for manufacturing sector, fell 7.8 percent in January, far more than economists had predicted. Federal fund futures showed that the market was pricing an approximate chance of 50% that the Fed would cut current interest rates of 5.25 percent by August. Since other central banks were hiking up interest rates, that would likely erode the dollars yield advantage.

Toward mid-week hawkish comments from Federal Reserve Chairman Ben Bernanke who stated that he expected stronger growth later this year and played down the negatives of the falling US stock markets. This buoyed the US currency and made it cling to gains made earlier in the session. Against the Mauritian rupee, the dollar was trading at MUR 33.206 yesterday compared to MUR 33.287 a week earlier.

Sterling suffered a lot throughout last week trading sessions as investors’ reassessed yield-dependant carry trades in a bid to avoid risks. In addition, data from the British Banker’s Association showed January mortgage approvals fell 16 percent from a year ago. This made analysts believed that the Bank of England’s three rate hikes since August were starting to be weight down. A slew of UK economic data did give support to the pound. British factory activity, as shown by the CIPS Manufacturing Purchasing Managers’ Index, came in at 55.4 for February above forecast of 53.0. However, the slid in global stock prices prevented the pound from pursuing its rally against the dollar. In fact, it fell sharply to $1.9250 towards the end of the week. Against the Mauritian rupee, the Sterling was trading at MUR 65.88 yesterday as compared to MUR 65.86 a week earlier.

The yen went thru a roller-coaster ride from the beginning of the week. Many investors started to unwind risky positions by reversing carry trades. Low volatility and ultra low Japanese interest rates made carry trades highly popular, encouraging investors to sell the low-yielding yen to invest in higher-yielding currencies. Throughout the week, yen rally was hurt by periodical by dollar rebound and that expectation that the sharp sell-off of risky assets might have been over. And at the end of the week, the yen posted a three-month high against the US currency, as the market was still anxious over the tumbling stock markets. Against the Mauritian rupee, the yen was trading at MUR 28.50 as compared to 27.64 same as a week earlier.

<B>Major data/events this week:</B>

<B>Wednesday 07 Feb :</B>

US Mortgage

<B>Thursday 08 March :</B>

US Jobless

<B>Friday 09 March :</B>

GB GDP

<B>Monday 12 March :</B>

US Fed budget

<B>Tuesday 13 March</B>

U, Redbook

GB Trade

<B>Vassan CALEEMOOTOO</B> <I>Contributed by HSBC</I>