Last week trading on the currency market saw the euro recovering most of its October losses against the dollar, after having dipped to a near three month lows at just below $1.2500 level. Dollar weakness was mainly attributed to prevalent negative dollar sentiment. The greenback fell after the Federal Reserve benign economic outlook forced investors to rethink the path of US monetary policy and sell the US currency.

The dollar friendly sentiment that had built up prior to the Federal Reserve decision to keep US interest rates steady crumbled overnight as chances of future interest hikes faded.

This view was further reinforced after the release of modest US durable goods orders, and new home sales as well as lower than expected US GDP growth data, pointing to a gradual slowdown of the US economy. Furthermore, comments by former Federal chief Alan Greenspan that institutional investors were shifting into euros dealt another blow to the already wobbling dollar.

<B>Ward off persistent inflation risks</B>

By contrast with the negative sentiment besetting the dollar, the euro was well-supported during last week by euro zone economic data and comments from European Central Bank officials that suggested the ECB would continue to raise interest rates next year in order to ward off persistent inflation risks. Another 25-basis point hike to 3.5 percent is widely expected before the end of the year but markets are less certain about what the ECB will do next year.

Against the Mauritian rupee, the euro was trading at MUR 43.23 as compared to 42.63 MUR last week.

<B>UK interest rate hawkish</B>

Over the week, the Japanese currency strengthened against the dollar after Japan?s top financial diplomat said he did not expect further yen weakness given the economy?s healthy fundamentals. These comments helped to erase earlier losses. Yen had been trading on a negative note as a slowdown in the growth of Japanese consumer prices suggested that the Bank of Japan could wait until 2007 before raising Japanese interest rates.

Yesterday, the Japanese currency was offered at MUR 28.65 as compared to previous Monday?s 28.32. Sterling firmed to a one month high against the dollar on the back of weaker than expected US third quarter growth data, which raised the prospect of a narrowing spread between the US and British interest rates. By comparison with a neutral US interest rate outlook, UK interest rate sentiment is hawkish at the moment, especially after the release of a report by an economic think tank. The National Institute of Economic and Social Research said inflation should fall back to the Bank of England?s 2.0 percent target by the end of next year if UK interest rates rise another half percentage point.

The Bank of England is widely expected to raise borrowing costs a quarter percentage point in November to 5.00 percent in an attempt to ward off inflation, boosting sterling?s yield appeal.

Yesterday, the pound was trading at MUR 63.74 as against MUR 63.09 last Tuesday.

<B>Kiat fen LIM AH LAN</B>