Conditions within the US economy remained a very important market influence while global credit conditions were also important as fears over US banking-sector losses had an important impact on both elements. The dollar generally remained under pressure during the week.

The Federal Reserve cut interest rates by a further 0.25% to 4.50% at the latest policy meeting. There was 9-1 vote with Hoenig dissenting and calling for unchanged rates.

The Fed also switched to a neutral policy stance as it was more concerned over inflationary pressure while it also stated that market strains had eased. There were still major Fed concerns over the housing sector and credit fears in the markets increased again after investment bank downgrades.

Third-quarter GDP was reported as 3.9% with the housing sector weak. The core inflation deflator held at 1.8% in the year to September while consumer confidence fell to a two-year low. US non-farm payrolls rose 166,000 in October after a revised 96,000 increase previously while unemployment held steady at 4.7%.

The Chicago PMI report was weak with a slide to below the 50.0 level for October while the national ISM index at 50.9. An important feature was evidence of strong export growth in the GDP report and the ISM report which boosted confidence in a lower trade deficit.

US Treasury Secretary Paulson stated that the US was strongly committed to a strong dollar. EU commissioner Almunia stated that currency-market volatility must be addressed, although the exchange rate comments from officials were generally measured and there was no evidence of any intervention to support the currency.

The EU Commission’s business confidence index fell to 0.87 in October from 1.08. The provisional consumer inflation rate increased sharply to 2.6% in October from 2.1% with the combination of weaker growth and rising inflation increasing uncertainty over ECB policy.

The US currency remained under pressure for most of the week and dipped to record lows around 1.45 against the Euro after Wednesday’s Federal Reserve interest rate decision with the trade-weighted index also at fresh 30-year lows. The dollar also failed to hold initial gains after the Friday payroll report.

The lack of dollar confidence and inflation warnings from the Swiss National Bank supported the Swiss currency. The higher than expected inflation rate of 1.3% pushed the franc to new 2-year highs around 1.1500 against the dollar.

The Bank of Japan again left interest rates unchanged at 0.50% by a 8-1 vote for the second successive month with Mizuno voting for an increase in rates. Bank governor Fukui took a generally cautious stance and the bank downgraded its economic assessment in the latest semi-annual report.

The yen was undermined by general interest in high-yield currencies for much of the time, although there were significant gains when Wall Street came under selling pressure. The yen found support close to 116.00 against the dollar with a move back towards 114.50 as stock markets fell.

The UK CPMI index for the manufacturing sector weakened to 52.9 in October from a revised 54.7 previously. Consumer confidence weakened in the latest month to -8 from -7 in September. The CBI retail survey weakened to an 11-month low.

There was mixed evidence on the housing sector with the Nationwide Bank recording a 1.1% increase in prices for October while the Hometrack survey was more downbeat and September mortgage approvals fell to a two-year low.

Bank of England MPC member Blanchflower stated that there were reduced wage pressures and that inflationary pressure was easing. MPC member Barker was more cautious over the need for a cut in interest rates while chief economist Bean warned that the bank must not be complacent over inflation risks.

Sterling again found support weaker than the 0.70 level against the Euro while the UK currency scaled fresh 26-year highs above the 2.08 level against the dollar.

The commodity-related currencies had a generally strong week, although there was significant divergence late in the week.

The domestic data was strong in both countries as Australian retail sales rose 0.8% in September. Markets priced in over a 90% chance that the Reserve Bank will increase rates next week. Canadian employment increased by a further 63,000 in October and unemployment fell to 5.8%.

The Australian dollar pushed to fresh 23-year highs above 0.93 against the US dollar after the US Federal Reserve interest rate decision, but then dipped sharply as global equity markets came under pressure.

The Canadian dollar strengthened to the highest level since the currency was floated freely in 1970 with a high beyond 0.94 against the US dollar after the employment data.

Have a great day and a wonderful weekend.