Conditions in the global credit markets and the prospects for the US economy have continued to be very important influences. Interest in high-yield currencies gradually recovered for the week as a whole which underpinned the Australian and Canadian dollars. In contrast, the yen and Swiss franc had a generally weaker tone as volatility levels remained high.

A generally stronger trend in global stock markets curbed defensive demand for the US currency, but credit and inter-bank lending markets remained tight as underlying stresses continued.

Following higher than expected new home sales last week, US existing home sales for July remained little changed at an annual rate of 5.75mn, the lowest level since late 2002. The latest evidence also suggested that prices have drifted lower.

There were further fears that mortgage-related stresses would undermine the wider economy. US consumer confidence fell sharply to an 11-month low in August as unease over the labour market increased while jobless claims rose to 334,000 in the latest week which suggested layoffs were increasing.

Minutes from the Federal Reserve August 7th FOMC meeting stated that the Fed was concerned over the credit trends and would take appropriate action if required. Following the Fed comments and minutes, there was further speculation over a near-term cut in interest rates with markets looking for further guidance from Fed Chairman Bernanke.

The German IFO index weakened in August to 105.8 from 106.4 the previous month, although the figure was still high in historic terms while there was a 15,000 decline in German unemployment for August.

ECB President Trichet stated that his comments on strong vigilance on prices were made before the latest market turbulence. The comments, along with similar comments from bank officials, increased speculation that the ECB would decide against a September rate increase.

The German government called for the ECB to hold rates steady and there was further political pressure for unchanged rates from the French government. The dollar overall weakened against the European currencies in choppy trading with a test of support levels above 1.37 against the Euro during Friday.

There was a sharp July decline in Japanese retail sales with a 2.2% annual decline. Unemployment fell to a 9-year low while core consumer prices fell 0.1% in the year to July.

The latest weekly capital account data recorded a firm surplus, but there was no evidence of strong capital repatriation back to Japan.

The yen strengthened temporarily after reports that Singapore-based DBS Bank had bigger than expected sub-prime related losses. There was, however, evidence of Japanese yen selling when the dollar weakened with investment trusts looking to allocate funds overseas before the end of August.

The yen briefly tested levels beyond 114.0 against the dollar, but failed to hold the gains as trading conditions remained very volatile with temporary losses to 116.50 as Japanese currency moves were dominated by global risk conditions.

The Bank of England was tapped for emergency funding on Wednesday which reinforced speculation that a UK bank was facing credit difficulties. The Bank of England refrained from making any comments on interest rate policy and Sterling sentiment recovered late in the week.

Sterling had a firmer tone against the dollar over the week as a whole with a challenge on levels above 2.02, although there were strong intra-day swings. The UK currency was little changed against the Euro with support weaker than the 0.68 level.

Swiss consumer prices fell 0.1% in August with the annual inflation rate falling to 0.4% from 0.7% which dampened expectations of a near-term interest rate increase. The Swiss franc weakened against the Euro during the week with lows near 1.65, but fluctuated around the 1.20 level against the dollar as cross movements dampened activity.