Interest rate trends dominated the markets for much of the week.

Headline US consumer inflation matched market expectations with a 0.2% increase for January, but the core rate was 0.3% with the annual rate rising to 2.7% from 2.6%, still significantly above the Federal Reserve's unofficial 2.0% ceiling. Elsewhere, jobless claims retreated to 332,000 in the latest week from 360,000 previously.

The FOMC minutes from January's meeting reiterated that members were more confident that the economy could achieve moderate growth with a gradual easing of inflationary pressure. The Federal Reserve maintained a tightening bias for interest rates despite discussion of a switch to a neutral stance.

The higher than expected inflation rate caused some adjustment of interest rate expectations with markets less confident that the Fed would be in a position to cut interest rates later this year.

The German IFO index weakened slightly to 107.0 in February from 107.9 in January.

ECB members continued to take a tough stance on monetary policy with a flurry of tough comments from officials. Market forecasts of ECB interest rates edged higher over the week with some banks calling for an increase in rates to 4.5% later this year.

After weakening to lows near 1.3190 against the Euro, the dollar secured some respite, but was unable to strengthen back through the 1.3060 level.

The Bank of Japan decided on an increase to 0.50% by an 8-1 vote which pushed nominal rates to the highest level for 10 years. Despite the increase, the yen weakened to lows beyond 121.5 against the US dollar.

Bank Governor Fukui stated that the bank would maintain an accommodative policy and continue to adjust interest rates gradually over the next few months with markets confident that rates would be left on hold for the next few months.

There was still strong market interest in carry trades with the yen weakening to a fresh record low against the Euro after the interest rate decision.

The Bank of England minutes recorded a 7-2 vote for unchanged interest rates in February with the two dissenters voting for a rate increase to 5.50% to contain inflation. The bank retained a tightening bias, but the majority of members wanted to wait for further evidence, especially as wage costs appeared under reasonable control.

The CBI industrial trends survey was stronger than expected with the headline output index at the highest level since 1995. Money supply and mortgage lending data was firm while credit card borrowing remained weak according to the latest data.

Sterling was undermined temporarily by Bank of England comments that depreciation of the exchange rate will probably be needed to correct the current account deficit.

Sterling weakened to a six-week low against the Euro at 0.6755 before correcting stronger to 0.6700 over the second half of the week. The UK currency found further support below 1.95 against the US dollar.

Australian Reserve Bank Governor Stevens stated that a further increase in interest rates was still more likely than a cut, although the governor was more confident over the inflation outlook than six months ago. Overall yield spreads moved in the Australian dollar's favour and the currency was supported by higher gold prices.

There was some caution over carry trades ahead of the Bank of Japan interest rate decision, but there was renewed interest in high-yield currencies following the central bank rate increase as carry trades returned to dominance.

The Australian dollar found support close to 0.78 over the week and strengthened to highs around 0.7915 before drifting weaker as momentum faded.

Have a great day and a wonderful weekend.