THE US dollar was strong last week against the major European currencies. The US economy is showing some sign of recovery, which might bring Federal Reserve easing of interest rates to a halt. Contrary to the trend in the US, the Germany GDP growth is expected to slow in 1996, to as little as 0.75 per cent according to Chancellor Helmut Kohl last week. Coupled with a high unemployment rate of 9.4 per cent, this might pressure the Bundesbank to ease interest rates further as long as the money supply is under control. The widening interest rate differential between the US dollar and the German mark will push the dollar up to 1.54 marks in the near term. The mark also traded lower against the Italian lira, as market participants were optimistic about the political situation in Italy after the centre-left Olive Tree alliance won the national election last weekend. Nevertheless, the dollar was lower against the Japanese yen on the back of cross trade on mark/yen. This is the first time the mark/yen broke the level of 70 yen to the mark since December, and the mark/yen trade dominated the week's activity in the exchange market. As Japanese GDP is expected to grow at 2.3 per cent in 1996, we may see a gradual pick-up of Japanese interest rates in the second half of the year. The yen should probably get technical support at the current level. The Canadian dollar traded lower to 1.36 against the US dollar for most of the week. The Bank of Canada is trying to keep short-term rates below their US counterparts as an attempt to help the sluggish economy. Without the advantage of preferential interest rates, the Canadian dollar will retain its soft tone in the short term. The Australian dollar has had a nice run-up to 79 US cents. Favourable economic data, including the consumer price index, which was up 0.4 per cent in the first quarter of 1996, and average weekly wages, up only 0.4 per cent for the three months to February 29, make the Reserve Bank of Australia less likely to increase interest rates. Profit-taking on the Australian dollar above 79 US cents will limit the upside. Francis Kwok is a fund manager at BNP Private Banking Asia.