The US currency gained strong support from an increase in risk aversion, especially as emerging-market currencies came under heavy pressure over the second half of the week. There was a repatriation of investment to the US while wider positions against the dollar were also scaled back.

The US mortgage sector was severely damaged by fears that Countrywide Financial would be forced into bankruptcy while underlying credit conditions continued to tighten which triggered increased margin calls.

The latest construction data recorded a drop in housing starts to 1.38mn for July from 1.47mn while permits also weakened to below the 1.40mn level with a 20% annual decline in both data series. The latest Philadelphia Fed manufacturing index weakened to 0.0 from 9.2 previously. There was a 0.1% increase in consumer prices for July while there was a 0.2% underlying increase to give a 2.2% annual increase.

The trade deficit fell to US$58.1bn in June from a revised US$59.2bn the previous month as exports rose to record levels. Long-term capital inflows remained strong in June at US$120.9bn even though total investment flows were weaker.

Given the market turmoil, markets moved to price in an interest rate reduction at the September meeting and a full 1% decline to 4.25% by the end of 2007. [The Federal Reserve cut the discount rate by 0.50% to 5.25%, but left the Fed funds rate at 5.25%]

The Euro was unsettled by uncertainty surrounding the European financial-sector and fears that further sub-prime related losses would be revealed.

The ECB was forced to add huge amounts of liquidity to the market to keep markets functioning. The chances of a September ECB interest rate increase were cut further to well below 50% from near 100% two weeks ago. The Euro weakened to lows below 1.34 against the dollar before a tentative recovery back towards 1.3470.

Sterling depreciated against the Euro over the week, but the main volatility was against the dollar and yen with the UK currency weakening to two-month lows against the US currency below 1.97.

The July UK consumer inflation rate fell sharply with a fall to 1.9% from 2.4% the previous month. The core inflation rate fell to 1.7% from 2.0%.

There was a decline in headline average earnings growth to 3.3% in June from 3.5%. Retail sales recorded a 0.7% increase for July to give annual growth of 4.4%, but retailers were forced to cut prices to maintain volumes.

The Bank of England minutes recorded a 9-0 vote for unchanged interest rates at the August MPC meeting. There was also a calm stance over inflation and no pressure at the meeting for a further near-term interest rate increase.

Markets moved to cut the chances of a further interest rate rise and, as market turbulence intensified, there was speculation that the Bank of England would cut interest rates by year-end.