The Australian dollar has dropped to two-month lows as a faltering euro led investors to shun riskier currencies on doubts the bailout for Ireland would not plug Europe's debt crisis.
Around midday, the dollar was trading at 96.15 US cents, having fallen as far as 95.84 US cents, and down from Friday’s close of 97.68 US cents. It was also buying 81.04 yen, 72.85 euro cents and 61.77 pence.
Disappointing domestic company profits data that suggest Wednesday's third-quarter growth report could be weak also took a toll on the Aussie dollar. Advertisement: Story continues below
Company gross operating profits fell 1.5 percent in the third quarter, far weaker than expectations for a 4 per cent rise.
The level of inventories was also shown to have fallen from the previous quarter and should subtract 0.3 percentage points from growth for that quarter.
Royal Bank of Scotland FX strategist Greg Gibbs said nervous investors allowed the local unit to trade ‘‘more or less in line with the euro’’.
‘‘It was up early and then down and now basically trading below where it closed in New York, which was a bit of a worry,’’ Mr Gibbs said.
‘‘I would suggest the market remains in risk aversion mode.
‘‘The main factor appears to be what’s happening in Europe.’’EU
governments on Sunday approved an 85 billion ($A115.59 billion) bailout for Ireland to help it withstand the weight of its banking crisis.
According to a statement released by the Irish government, the country will take 10 billion euros ($A13.6 billion) immediately to boost the capital reserves of its banks. Another 25 billion euros ($A34.0 billion) earmarked for the banks will remain in reserve.
US stocks markets fell on Friday, with holiday-thinned rank of traders taking their cue from European markets.
Mr Gibbs said traders were waiting on new information from Europe.
‘‘If anything, the news should be better (with details emerging of) the Irish package.
‘‘I guess that wasn’t anticipated and the market’s pretty nervous.’’
Mr Gibbs said the local unit lost ground after an unexpected fall in business inventories which could most likely contribute to a negative GDP reading in the December quarter.
‘‘I think the market’s pretty nervous at the moment,’’ Mr Gibbs said.
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The Australian dollar jumped close to parity overnight, as a combination of factors such as surging commodity prices and improved risk appetite hurt the US dollar in a very thin year-end market.
The dollar climbed to a one-month high of 99.84 US cents, its highest since it last hit parity on November 12, and up from Monday’s close of 98.54 cents. In early trade this morning, the local unit was at 99.71 US cents.
Overnight, China extended a requirement for six major banks to set aside additional money by another three months, state media said.
Ratings agency Moody’s warned the United States will put its top level credit rating at risk if Congress extends a sweeping package of tax cuts and unemployment spending.
HiFX senior trader Stuart Ive said these two pieces or news increased investor appetite for risk assets and weakened the US dollar.
‘‘Even though China upped the reserve requirement for the banks, the fact (that) they didn’t raise interest rates put risk appetite back on,’’ Mr Ive said from Auckland. ‘‘That... combined with Moody’s... last night effectively (saying) that, if the proposed US tax plan is put in to place it increases the likelihood of a negative outlook on the US’s triple A credit rating.’’
Mr Ive said higher commodities prices also helped push the Australian dollar higher.
Parity within reach
Rochford Capital managing director Thomas Averill said parity was only a half US cent away from the Australian dollar’s current value so it’s not unreasonable to expect to reach it again.
“I would not be surprised to see (the dollar) heading up toward parity over the next few days,” he said.
However, Mr Averill doesn’t expect a dramatic rise in the near term.
“I think the Aussie and equities markets are likely to trade a little sideways between now and the end of the year,” he said.
That means the Australian dollar is unlikely to rise over its November high of $US1.015 until the beginning part of 2011.
China's decision not to lift interest rates also helped lift the dollar, said CMC Markets strategist Ric Spooner.
"This is a near-term positive for Australian exporters to China," he said. "The Aussie dollar has rallied to just below technical resistance at around parity with the US. A break above this level may see it retest the high at $US1.0176."
The outlook for commodities and exports influences the value of the Australian dollar, which is used by some overseas investors as a proxy for Asia's growth.
Focus on Fed meeting
The focus for the rest of this week is likely to be the US Federal Reserve monetary policy meeting on Wednesday morning.
‘‘I would expect there would be a chance there will be a statement from (Fed chairman) Ben Bernanke that the US economic data has slightly increased,’’ Mr Ive said. ‘‘The focus of the Fed is the employment data and we’re yet to see a significant increase in those numbers at the moment.
Mr Ive said he expected the Australian dollar to trade between 99.40 US cents and 100.00 US cents today.
The Australian dollar hit parity for the third time in three months after a stronger session on global sharemarkets, but soon retreated as investors took profit.
The dollar traded as high as 100.24 US cents earlier this morning, after stocks in the US rose and investor appetite for risk assets – like the local currency – increased. US markets were helped by a better than expected November retail sales figure.
The Australia dollar has since eased back to 99.5 US cents around midday, on par with Tuesday's close.
Rochford Capital senior foreign exchange consultant Tom Averill said the dollar lost some ground in the morning session on overnight profit taking.
He said this morning’s statement from the US Federal Reserve monetary policy meeting was as expected and attributed the local currency’s strength to gains on offshore equity markets.
‘‘We have seen both the Dow Jones and the S&P break through their resistance levels and recent highs in the trading over the last few days, which confirms a robust equity market environment,’’ Mr Averill said. ‘‘That associated risk appetite will continue to provide support for the Aussie.’’
When investors are confident about future growth, they put money in stocks, commodities and currencies exposed to resources exports, like the Australian dollar, all known as risk assets.
“On the whole, I think risk appetite is fairly buoyant and you’re seeing the Aussie and equities get quite a lot of support on that,” Rochford Capital managing director Thomas Averill said.
The dollar briefly touched parity with the greenback in October, and then again on November 12.
Also, overnight the US Federal Reserve kept interest rates steady at near zero, where they have been since the beginning of the financial crisis. That compares to Australia, where the Reserve Bank lifted rates to 4.75 per cent in November.
Currency values are highly linked to the interest rates associated with them.
The dollar's high-wire act is both a blessing and a curse
Clancy Yeates December 18, 2010
As the Australian dollar exploded out of the blocks this year, travellers' shouts of glee were almost drowned out by cries of pain from exporters.
For every tale of a tourist getting a bargain hotel room overseas, it seemed there was a local exporter suffering a swingeing cut in income.
Non-exporters also reported being undercut by overseas rivals, while the high currency gave foreign students another reason to put off that study tour to Australia. Advertisement: Story continues below
Many economists warned these were just the first symptoms of a two-speed economy set to take the gloss off the mining boom. States and industries would be divided by their capacity to cope with a surging currency and higher interest rates - a scary prospect for the debt-laden households and non-mining businesses of NSW and Victoria.
However, as the dollar this week struck parity for the third time in as many months, it seems the economy is coping with a high currency better than many expected.
The dollar's surge has without doubt inflicted a hefty toll on some businesses, but the country's biggest exporters have been more than compensated by huge price rises.
There is no guarantee parity is here to stay, of course. Yet the experts now see a high dollar as a fixture of the mining boom.
So if they are right, just how will the economy handle a sky-high currency next year?
Evidence so far suggests that even though the dollar crimps some industries, the export-led bonanza has little to fear from a strong Aussie dollar. As the economy tries to adjust to the mining boom, analysts say the exchange rate will also bring plenty of economy-wide perks, besides cheap overseas trips.
According to the text books, a rising exchange rate redistributes the benefits of an export boom. A strengthening in the dollar should take a bite out of exporters' profits, while boosting consumption by giving shoppers more spending power on imports.
However, in the current mining boom households have remained stubbornly frugal and exporters continue to profit handsomely from Asia's hunger for resources.
Far from suffering from weaker income or lower competitiveness, the country's biggest exporters in mining, energy and agriculture are enjoying record prices.
Westpac's chief currency strategist, Robert Rennie, says one reason for this puzzling trend is that more and more of our biggest trade deals are now done in US dollars.
About 55 per cent of all trade in a basket of key exports such as iron ore, coal, LNG, grain and dairy is done in US dollars - compared with about 35 per cent in the late 1980s.
This means a rising dollar has little bearing on the price charged to foreign buyers.
''In the case of products that are sold in US dollars, the appreciation of the currency does not crimp demand and does not force exporters to look elsewhere,'' says Rennie, who forecasts an exchange rate of $US1.02 by June.
As well, many commodity exporters have had the US dollar price of their products rise even faster than the currency. Coal and iron ore prices, for instance, have more than doubled since before the global financial crisis, more than making up for any negative currency effects.
''It appears the mining sector copes pretty well with the high Aussie dollar because commodity prices are rising at an even-faster pace than the currency,'' says Stephen Roberts, the chief economist at Nomura.
Even among many smaller and medium businesses, there are signs the high dollar ranks as a secondary concern behind a potential slowdown in Asia.
The Westpac-Australian Chamber of Commerce and Industry index of industrial trends, published last week, was back above its decade-long average in the December quarter, despite rising interest rates and the strong dollar. According to the survey, worries about the dollar were more than offset by strong demand for their goods.
This week's NAB business conditions survey also a showed slight improvement last month, although conditions were still weaker than usual.
The chief economist at RBS, Kieran Davies, says the dollar is only one factor affecting exporters - and it is generally outweighed by the strength of Asian trading partners.
''The economy handles a strong dollar, given that most of our exports now are to Asia, which is growing strongly,'' he says.
Even so, the sky-high Australian dollar has put many non-resources businesses under severe stress, none more so than Australian services exporters, which account for almost a quarter of exports.
Unlike the miners, services companies have not enjoyed a doubling in the price of their output, nor do they enjoy booming foreign demand.
The chief executive of the Australian Industry Group, Heather Ridout, highlights the fate of services and manufacturing when describing the high dollar as a ''double whammy'' for many businesses alongside higher interest rates.
She warns there are ''considerable risks in developing into an economy with an overly high reliance on sales of a narrow range of commodities to a small number of trading partners''.
''While some manufacturers are benefiting from cheaper inputs, our own research has shown that twice as many manufacturers report negative impacts from the higher dollar than the number reporting positive impacts,'' Ms Ridout says.
''In the services sector, the number of businesses who report negative impacts is about 65 per cent higher than the number reporting positive impacts.''
This fallout from a high dollar is clearest in education (an ''export'' to foreign students) and tourism, despite the best efforts of Oprah Winfrey to promote Australia to the world.
Overseas visitors continue to arrive, but tourism operators are battling against a long-term flood of Australians cashing in on the currency to head overseas. Figures for the year to October show that departures from the country exceeded arrivals by more than 100,000.
This weakness in services exports has not gone unnoticed by the Reserve Bank board, and minutes from last month's interest rate decision said: ''Visitor arrivals had increased only modestly over the past five years, while overseas departures by Australians had increased strongly, with a consequent decline in domestic tourism. The high exchange rate had also had a negative effect on the education sector, although changes in government policies were likely to have been a more important factor.''
But as painful as a strong dollar is for these sectors, it is a different story for the economy as a whole.
In its latest Statement on Monetary Policy, the Reserve Bank said many of us were benefiting indirectly from the boost to national income, as a high dollar boosts consumers' spending power.
As well, the currency's surge has helped to keep a lid on inflation by lowering the price of imports, especially foreign manufactured goods. For instance, the latest consumer price index figures showed audio, visual and computing equipment prices fell 20 per cent in the year to December, while clothing and footwear prices also fell 2.8 per cent.
When the Reserve Bank raised official interest rates to 4.75 per cent this month, the governor, Glenn Stevens, highlighted this effect, saying a higher dollar would ''assist, at the margin, in containing pressure on inflation over the period ahead''. With a mounting pipeline of investment set to flow next year, markets are betting Stevens has more work to do and the bank will raise rates by a further 50 basis points. However, the high dollar could restrain the price of any rates rises.
Barring another meltdown in the financial system, analysts say this combination of a mining-led investment boom and likely rate rises should keep the dollar near parity next year. That may be bad news for some industries, but if market forecasts are to believed, a high dollar is here to stay.
The Australian dollar was lower this morning on intensifying concerns that the European sovereign debt crisis could spread.
The local currency was trading at 98.75 US cents, down from Friday's close of 99.00 US cents.
Since Friday's locla close, the local unit traded in a range between 98.41 US cents and 99.17 cents.
Over the weekend, the Australian dollar breached the 75 euro-cent mark, hitting its highest levels since the euro began trading in January 1999. This morning it reached an all-time high of 75.1 euro cents.
Bank of New Zealand currency strategist Mike Jones said the Australian dollar is starting the week softer after the US dollar strengthened on Friday night.
"The Aussie dollar was pretty much off the market's radar, but the US dollar put some downward pressure on the Australian dollar," Mr Jones said.
On Friday night, Moody's Investors Service slashed its credit rating for Ireland by five notches from Aa2 to Baa1 because of increasing uncertainties over the debt-stricken country's economy and finances.
"This intensified worries about the spread of the European debt crisis," Mr Jones said from Wellington.
"That saw equity markets mostly in the red and commodity prices were reasonably firm but we did see an increase in demand for safe haven currencies like the US dollar and the yen at the expense of the likes of the Euro and the Aussie," he said.
On Tuesday, the Reserve Bank of Australia releases the minutes of its December 7 monetary policy meeting, when it kept the cash rate on hold at 4.75 per cent.
"It doesn't look like we'll get too many surprises from those minutes with all and sundry now expecting the RBA to remain firmly on hold over the next few months.
"It's probably going to be the offshore picture that is going to provide direction for the Aussie dollar this week.
"In that regard, we'll probably see attention remain on Europe (to see whether) the crisis is spread from Ireland," Mr Jones said.
He expected the Australian dollar to trade between 98.40 US cents and 99.20 US cents.
Dollar struggles to reach parity, hits new record against euro
December 22, 2010 - 4:32PM
The Australian dollar notched up new highs on the euro and sterling on Wednesday in the wake of downgrade warnings on Portugal and Greece, though a report China could buy more euro zone debt offered some limited support to the single currency.
The euro was initially on the defensive on fears Greece and Portugal debt could be facing downgrades in the wake of Ireland's multi-notch downgrade last week.
Against the euro, the dollar traded as high as 75.94 euro cents, up from yesterday's close of 75.62 and a new record mark against the single currency.
"[China] helped a little, it's a combination of that and local profit-taking through our time zone," said Peter Jolly, head of research at National Australia Bank.
"It's been a big run [for the Aussie], in the last couple of days particularly," he added.
The euro has shed more than 2 per cent on the Aussie since Friday, when Moody's slashed Ireland's ratings by five notches, and is down around 17 per cent for the year so far.
"I wouldn't be surprised if it just edged off into the end of the year as people tend to clear their positions toward the end of the year," said Jolly.
The Aussie reached a fresh 25-year high against sterling around $1.5526 per pound, following a record high UK borrowing need.
Underpinning the currency has been a recent run-up in commodities with the CRB index rising to a two-year peak, while copper prices hit another record.
But the Aussie was slightly more restrained against the US dollar at 99.70 US cents, having last hit parity on December 14.
The psychological $US1 handle is the next upside target for the Aussie while support is layered at 99.45 US cents, 99.10 US cents and the December 20 low of 98.82 US cents.
The Australian dollar is ending the year on a high note, pushing through parity with its US counterpart again overnight as it marked yet another record against the European common currency.
In offshore trade, the dollar topped the 100-US-cent mark, reaching a high of 100.11 US cents in the early hours of the morning, shy of the record 101.83 US cents touched in November but well up on the May lows when the $A was worth just 81.58 US cents.
Since then, largely on the back of weakness in the US currency, it has pushed through the parity point four times. Last night, demand for commodities helped propel the Australian dollar - the $A and commodities prices are closely linked.
But against the euro, which is used in sixteen countries that are members of the European Union, the Australian dollar hit a high of 76.48 euro cents shortly after 4am eastern daylight time. The 10-year average for the Aussie against the euro is about 59 euro cents.
The euro has floundered recently amid continuing signs of debt problems, particularly in Ireland, falling more than 8 per cent against the US dollar since early November. There are concerns those debt woes could flow through to other countries, particularly Portugal and Spain.
By about 10am, the $A had come back a little to trade at 99.92 US cents and 76.23 euro cents.
The Australian dollar has also been trading at quarter-century highs against the British pound and was this morning buying more than 65 pence. It has climbed about 3 pence since the start of the month. In 1985, it was buying about 74 pence but has not come close to those levels since.
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The Australian dollar reached the highest since the currency was freely floated in 1983 as US data spurred speculation global growth is gathering momentum, boosting demand for currencies with higher-yielding assets.
The Aussie traded above parity with the US dollar for an eighth-straight day after copper prices climbed to record levels, boosting export prospects for the resource-rich nation. Data out next week may show US manufacturing grew at the fastest pace in seven months.
“Data we’ve got out of the US has improved,” said Robert Rennie, chief currency strategist in Sydney at Westpac. “I think we finish 2010 on an upbeat note from a global economic point of view. That’s supportive of commodity prices and currencies like the Aussie and (New Zealand’s) kiwi.”
Australia’s currency reached $102.39 US cents in late-morningg trade in New York, the highest since July 1982, before easing to 101.7 US cents. It was also buying 76 euro cents, 83 yen and 65 pence.
The nation stopped pegging its currency to a trade-weighted basket of currencies in December 1983.
The Aussie had a 14 per cent gain this year against its US counterpart, the second-best performer after the yen. Westpac’s Rennie forecast the Aussie to stay above the parity level for at least the first half of 2011 before markets start to price in changes in US monetary policy.
US data
The US currency weakened after economic reports yesterday showed business expansion, fewer jobless claims and more pending home sales. The data signaled the world’s largest economy is accelerating into the new year, encouraging demand for currencies in nations with higher-yielding assets.
The London Metal Exchange Index of six metals including copper and aluminum gained 0.7 per cent yesterday to the highest level since April 2008. Copper futures for March delivery rose to an all-time high on the Comex in New York.
Australia’s dollar has gained 11.7 per cent in 2010 in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The US dollar declined 3.5 per cent, extending a 10 per cent slide in 2009, while New Zealand’s dollar was up 4.8 per cent. Benchmark interest rates are 4.75 per cent in Australia and 3 per cent in New Zealand, compared with as low as zero in the US and Japan, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.
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