Global credit conditions were very important during the week with the impact on stock and bond markets feeding through into the major currencies.
The US currency secured some support from an unwinding of carry trades while a drop in commodity prices over the second half of the week also boosted the dollar with a defensive flow of funds into US Treasuries.
There was further speculation over a breaking of Middle East currency pegs which unsettled the dollar at times with the UAE warning that there could be a regime shift due to persistent dollar weakness. US Treasury Secretary Paulson stated that the dollar would rebound and took a slightly stronger stance over the US currency.
US retail sales rose a headline 0.2% for October while the underlying increase was also 0.2%. Elsewhere, jobless claims rose to 339,000 in the latest week from 319,000.
The New York manufacturing index remained robust while the Philadelphia Fed index rose slightly to 8.2 in November from 6.8, although the underlying components were less robust.
Consumer prices rose 0.3% in October as energy prices increased while the core increase matched market expectations at 0.2% to give a 2.2% year-on-year increase.
The dollar resisted fresh record lows against the Euro during the week and temporarily strengthened back to near 1.45. There was a also a recovery on a trade-weighted basis, but the currency struggled to make much headway.
The Bank of Japan left interest rates unchanged at 0.50% following the latest council meeting by an 8-1 vote with Mizuno voting for an increase for the third consecutive month. The bank also warned over the growth risks caused by US weaknesses.
International market trends were still the dominant influences on the yen. There was a general unwinding of carry trades which provided important yen support. The yen strengthened to highs near 109.0 against the dollar with the US currency struggling to sustain corrective rallies.
The Swiss franc also gained support from an unwinding of carry trades and tested below 1.12 against the dollar, the strongest franc level since 1995. The Swiss currency also regained further ground against the Euro with highs near 1.64.
Headline UK consumer inflation was higher than expected with an increase to 2.1% for October from 1.8% previously, but the core inflation rate held steady at 1.5%.
Retail sales dipped 0.1% in October which cut annual growth to 4.4%. The labour market data remained firm with a further decline in unemployment claims while headline earnings growth rose to 4.1%. The latest RICS housing survey recorded a further deterioration with the index weakening to fresh two-year low of -22.2.
The Bank of England in its quarterly inflation report stated that the 2.0% inflation target would be met on the assumption of at least one interest rate cut over the next year. Bank Governor King also took a generally downbeat view over the economic prospects while warning that there was the risk of stock market falls.
From highs above 2.10 against the dollar, Sterling fell sharply this week with a low near 2.04. The UK currency also weakened rapidly against the Euro with a 54-month low near 0.7170.
Commodity-related currencies have remained volatile over the week with net losses against the US currency. Despite initial strength, there was a sharp drop in metals prices over the week which while a general drop in risk reduction also undermined the Australian and Canadian dollars. The Australian dollar weakened to lows near 0.88 while the Canadian dollar dropped to lows beyond 0.98.
