The dollar tumbled against major currencies on Monday, with marked losses against the yen driving the US currency lower across the board. The greenback hit a near three-year low against the yen after markets interpreted a G7 call for flexible exchange rates as a sign that Japan may stop intervening in the currency markets to dampen the yen in an effort to protect the country export competitiveness.

The G7 meeting, which took place over the week-end in Dubai, was more hawkish than its usual stance to ?monitor exchange markets closely and cooperate as appropriate?. It called for more exchange rate flexibility to help smooth out global economic imbalances.

Markets interpreted the statement as endorsing the floating rate argument and bearing ill abode for countries such as China and Japan.

Equally, analysts viewed the statement as a step away from the strong dollar policy, and a transfer of the US trade deficit across into Asia, where for instance Japan enjoys a huge trade surplus.

The G7 meeting and yen gyrations overshadowed the release of positive economic data for the US economy. Initial weekly jobless claims fell below expectations while the index of leading indicators suggested economic growth will strengthen in the second half of the year.

Elsewhere, in a widely anticipated move, the Federal Reserve left its overnight lending rate at a 45-year low of 1 pct, warning that inflation could become ?undesirably low?. Against the Mauritian rupee, the common currency was trading at MUR 33.55 as compared with MUR 32.64 a week earlier.

The yen soared to its highest level in nearly three years against the dollar on Monday on speculation Japan will step down its intervention efforts following a call by G7 for flexible currency regimes. The G7 did not specifically pinpoint any currencies in its statement, but analysts interpreted it as targeting Japan to the extent that the latter has intervened actively in the past to curb the currency?s rise. Tokyo spent some nine trillion yen ($77.6 billion) in currency intervention in the first seven months of the year, then refrained from intervening in August.

However speculation is rife that the Bank of Japan, acting as an agent for the Ministry of Finance, has also intervened this month to stem the yen?s latest advance. On their part, Japanese officials insisted the G7 statement did not represent an appreciable change to its FX policy. Japan?s top financial diplomat, Zembei Mizoguchi, said the nation?s stance on acting in currency markets had not changed. Newly appointed finance minister Sadakazu Tanigaki echoed that view. Analysts say attention is being focused on the dollar/yen axis as Japan is expected to emerge as a winner in a situation of global economic recovery. Given its huge trade surplus with most countries, Japan is well-positioned to benefit from a global upswing in the industrial production cycle.

Yesterday, the Japanese currency was offered at MUR 26.15 as compared to MUR 25.29 on last Tuesday.

Sterling jumped to 2-1/2 month highs against the dollar on Monday, taking its cue from the greenback?s broad-based weakness against the yen. Domestic fundamentals also lent support to the pound, as it benefited from the goodwill of this week?s earlier strong UK retail sales data. August retail sales rose 0.2 percent on the month and 3.8 percent on the year, both marginally above expectations.

Coupled with a fall in British unemployment, the upbeat consumer data reinforced speculation the Bank of England might resort to a rate hike before long, thereby boosting the interest rate differential argument in favour of the pound. Yesterday, the pound was trading at MUR 48.21 as against MUR 46.70 on last Tuesday.

Major data/events this week:

? Thu 25 September

US jobless claims, US durable goods, Ger Ifo business climate, Jap retail sales.

? Fri 26 September

US final sales, US real GDP, US University of Michigan Sentiment index.

? Mon 29 September

Ger Gfk consumer sentiment.

? Tue 30 September

Fr unemployment rate, Fr Q2 GDP, UK Q2 GDP.