Aussie reaches 2-year high on US weakness

A WEAK US dollar after a downside surprise in economic data propelled the Australian dollar to a two-year high yesterday, topping 78 US cents for the first time since June 2015.

The local currency was at 78.19 US cents shortly after midday yesterday, up from 77.49 US cents on Friday.

BetaShares Capital chief economist David Bassanese said the surge came on the back of US Consumer Price Index data, which made the market less confident of further Federal Reserve rate rises.

“The CPI numbers on Friday are definitely having a flow through effect,” Mr Bassanese said.

“Inflation has surprised on the downside for a few months now, so further confirmation of that is putting the pressure on the Fed to basically not raise interest rates this year.”

US CPI remained unchanged in June after falling 0.1 per cent the previous month and retail sales fell for a second straight month, pointing to tame inflation.

Mr Bassanese said US Fed chief Janet Yellen’s comments earlier last week that rate hikes could be gradual due to persistently low inflation was also a big mover for the Aussie dollar.

“Inflation has surprised on the down side in the last few months and markets are starting to factor in the risk that the fed could actually be under pressure not to raise interest rates,” he said.

He said that, plus Australian sentiment the Reserve Bank of Australia could in fact raise interest rates and follow a more hawkish global lead, pushed the dollar up.

However, Mr Bassanese believes while the RBA will be annoyed by the Aussie dollar’s climb, it will keep the cash rate at a record

low of 1.5 per cent.