Global and US economic fears increased over the week and these uncertainties had an important impact on currency markets as credit difficulties persisted.

There was a small increase in US housing starts for October, but permits remained weak while single-family house starts continued to fall. The NAHB housing index stabilised at 19 in the latest month. Other data releases were limited with a small drop in jobless claims while consumer confidence was little changed at near two-year lows.

The Federal Reserve minutes from October’s meeting stated that the decision to lower rates was a close call while rate cuts could be reversed readily. The Fed, however, also downgraded its GDP growth forecasts for 2008 with a new 1.8 - 2.5% forecast range which reinforced market concerns over the economy.

Confidence in the economy remained weak following a profits and lending warning from mortgage lender Freddie Mac with increased fear over the implications of financial-sector weakness. Despite the Fed comments, markets continued to price in fully a further interest rate cut for December.

Euro-zone industrial orders fell 1.6% in September which cut the annual growth rate to a nine-month low of 2.0% while French spending growth also weakened sharply. The Euro-zone November PMI index for manufacturing rose to 52.6 from 51.5 previously, but the services index fell significantly to 53.7 from 55.8 and overall concerns over growth trends increased.

There were expressions of concern over the Euro’s level with Euro-Group head Juncker stating that it was no longer possible to take a benign approach to the Euro gains while German Chancellor Merkel also expressed concern over the Euro.

ECB President Trichet also stated that he was against rapid and brutal currency moves. These comments indicate that concern over the Euro’s strength is increasing, although Trichet held back from actually describing the recent currency moves as brutal. This is an important distinction and still signals reservations over intervening. There was no major increase in dollar support from US officials.

The dollar remained under pressure over the week as a whole with renewed post-1945 lows on a trade-weighted index while there were fresh record lows beyond 1.4950 against the Euro. The Euro corrected weaker to 1.4810 later on Friday.

The increase in risk aversion provided further important support to the low-yield currencies as carry trades wee scaled back. The Japanese currency strengthened against all major currencies over the week. Against the dollar, the yen broke through the August 2007 highs and pushed to 24-month highs near 107.50. The Swiss franc also strengthened to fresh all-time highs against the dollar with a peak close to 1.09.

Risk aversion also hit high-yield currencies. The Australian dollar was unable to reclaim the 0.90 level against the US dollar and weakened to lows near 0.8650 even though the US currency was generally depressed.

Comments from Finance officials over the yen gains were generally limited with no strong warnings against the moves which suggests some tolerance of a stronger yen.

Sterling remained under pressure against the Euro and tested support levels beyond 0.72 against the Euro, the weakest level for over four years.

Minutes from November’s MPC meeting recorded a 7-2 vote for unchanged interest rates with Blanchflower and Gieve voting for an immediate cut in rates.

UK Libor rates continued to increase with rates pushing above the 6.50% level which was a two-month high and 0.25% above the level at the time of November’s MPC rate decision to hold rates unchanged.

The economic data generally suggested a slowdown in growth as money supply expansion slowed, although the CBI industrial survey was resilient. Third-quarter GDP growth was revised down to 0.7% from 0.8% originally while mortgage approvals fell sharply.