Central bank policy actions were the dominant focus over the week as a whole, especially with several banks holding regular monetary meetings.
The Bank of England cut interest rates by 0.25 to 5.50%, the first reduction for two years. The bank pointed to the downside economic risks emanating from the credit restrictions, but there were still some concerns over inflation within the statement.
The UK economic data was generally weak with the PMI index for the services sector weakening to a four-year low of 51.9 from 53.1 previously. The construction PMI index also dipped to a 14-month low.
The Halifax Bank reported that house prices fell 1.1% in November, the third successive monthly decline, while evidence of credit tightening persisted. The British retail consortium reported a 1.2% annual like-for-like increase in sales while consumer confidence weakened sharply.
Sterling weakened sharply against the dollar for the week as a whole with lows below the 2.02 level before a recovery. The UK currency also weakened to re-test 2003 lows against the Euro beyond the 0.7220 level following the rate decision.
The Bank of Canada cut interest rates by 0.25% to 4.25% due to fears over a sharp slowdown in growth and this pushed the Canadian dollar to lows around 1.02 against the US currency. The PMI data offered some relief and the Canadian dollar strengthened further back to near parity after a strong 42,000 employment increase.
As far as the US economy is concerned, the ADP employment report was stronger than expected with an increase of 189,000 in November after an upwardly-revised 119,000 increase the previous month which offered some optimism over the labour market, although jobless claims remained above the 330,000 level in the latest week In the event, the monthly payroll increase was close to expectations with a 94,000 November increase
The ISM index for the manufacturing sector edged lower to 50.8 in November from 50.9 previously while the services-sector index fell to 54.1 from 55.8. The employment indicators were subdued in both reports, but there was a jump in the prices components. November average earnings also rose 0.5% which triggered some inflation unease.
US Treasury Secretary Paulson continued to push ahead with plans to freeze the level of interest payments on certain sub-prime mortgages and lessen the risk of foreclosures.
Markets continued to price in a further Federal Reserve cut in interest rates next week, but speculation over a more aggressive 0.50% cut faded slightly as the sense of panic over economic trends faded slightly.
Despite evidence of tensions, the Gulf Cooperation Council (GCC) stated that there would be no change to the dollar pegs which provided some minor US currency relief.
The ECB left interest rates unchanged at 4.0% following the latest council meeting.
Bank President Trichet stated that the bank would act in a firm and timely manner. The bank also warned over upside inflation risks while there were downside growth risks, illustrating the difficulties faced by the ECB.
The bank’s stance overall was slightly stronger than expected with Trichet pointedly stating that there had been some calls for rates to be increased at the meeting. This severely dampened market speculation that rates could be cut in the near term.
German Finance Minister Steinbruck stated that currency moves had become disorderly, but the ECB steered away from making aggressive currency-related comments at the policy meeting.
The dollar was subjected to choppy trading during the way with a pattern of sharp rallies quickly attracting fresh selling pressure. The US currency secured net gains against the Euro with a peak around 1.4530 before weakening back to 1.4650. The US currency also pushed to one-month highs on a trade-weighted basis.
The Japanese yen and Swiss franc trends were dominated by levels of risk aversion in the markets. A sustained rally in global stock markets pushed the yen to lows around 111.70 against the dollar while the Swiss currency weakened to 1.1350.
