Conditions within financial markets remained a very important focus, but attention tended to switch more towards economic conditions and policy responses as the stream of very weak data releases continued and confidence remained very fragile.

There were increased fears over the US fundamental outlook while defensive demand for the currency was also weaker as markets attempted to stabilise. Dollar Libor rates fell which suggested that funding pressures could be easing. Gold prices also rose for the week as a whole.


The employment data continued to give cause for concern this week with initial jobless claims rising to 573,000 in the latest week from a revised 515,000 the previous week. This was a 26-year high for claims and continuing claims were at a record high. Retail sales fell by a further 1.8% in November with a core 1.6% decline after a 2.4% fall the previous month.

Continuing stresses within the labour market maintained expectations that the Fed will cut interest rates again to below 1.0% next week and also consider more radical, direct quantative policies to support the economy.

The trade deficit widened to US$57.2bn in October from US$56.6bn the previous month as imports from China were at a record high. Import prices continued to decline sharply which alleviated upward pressure on imports.


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Congressional negotiations surrounding a support package for the auto sector was an important focus over the week and Senate rejection of the plan caused a renewed spike in risk aversion on Friday which triggered a partial reversal of dollar losses.

The Euro-zone industrial data remained wea

k with sharp production declines for Germany, France and Italy for the latest month The latest ZEW business confidence survey recorded a second successive monthly recovery to -45.2 in December from -53.5 the previous month.

ZEW officials were still generally downbeat over economic prospects while Euro-Group head Juncker also warned that there might not be a recovery in the Euro-zone economy until 2011.

ECB officials continued to indicate that the decline in inflation would make it easier to cut interest rates, although they re-iterated that the bank would not pre-commit on rates. There were also mixed comments with Stark, for example, stating that the bank did not have a lot of room for manoeuvre following the 0.75% cut this month.

The dollar generally lost ground over the week, notably against the Euro with a seven-week low around 1.34, as a combination of factors unsettled the US currency while it also lost ground on a trade-weighted basis.

Bank of Japan Governor Shirakawa stated that the authorities were closely monitoring the impact of yen gains on the economy. Importantly, he also stated that the Finance Ministry could order market intervention if the yen continued to strengthen.

The Japanese currency retained a generally firm tone over the week, although there was a diversity of performance as fundamentals attempted to reassert themselves. The yen strengthened to a 13-year high below the 90.0 level on Friday as the US auto-sector bailout plan was rejected and Asian equity markets fell sharply.

The Canadian dollar weakened to test October lows around 1.30 against the dollar, but then strengthened to highs beyond 1.22 in very volatile trading. The Bank of Canada cut interest rates by a further 0.75% to 1.50% and lowered its assessment of the economy.

The UK data offered no sign of relief over the economy. Industrial production fell by a further 1.7% in October, the eighth successive decline, to give a 5.2% year-on-year decline. The BRC retail sales report recorded a decline in like-for-like sales of 2.6% in the year to November while housing activity remained at a record-low.

Forward-looking data was still weak with the CBI orders index edging only slightly higher to -35 in December from -38 previously. MPC member Sentance warned that there would be a long and deep recession, although he also warned that the sharp interest rate cuts would need time to have an effect. There was some tentative evidence of an improvement in sales according to the latest weekly John Lewis report.

The German Finance Minister attacked the government’s budget policies and this contributed to negative sentiment surrounding the UK economy.


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Sterling remained under pressure for much of the week as confidence remained at extremely weak levels. The currency dipped to record lows beyond 0.89 against the Euro, but did secure a small advance net against the dollar.

At Thursday’s policy meting, the Swiss National Bank cut interest rates by 0.50% to a band of 0.0 – 1.0% with a central rate of 0.50% which was in line with market expectations.

The bank downgraded its outlook for 2009, forecasting that the economy would contract for the year, and it took a notably pessimistic stance towards the economy as a whole. The bank stated that it may have to consider alternative quantative measures to support the economy. Bank member Hildebrand also stated that the weakening of the franc was a deliberate policy which further eroded confidence in the currency.

The franc weakened sharply against the Euro over the week and dipped to lows beyond 1.58, the weakest level for over two months before some respite. The franc still managed to secure a net advance to highs beyond 1.18 against the dollar.