Neutral stance on interest rates sees Aussie dollar fall

AN UNCHANGED position on interest rates from Australia’s central bank dominated major currency markets yesterday, pushing the Australian dollar almost 1% lower and spurring a bounce for the yen from seven-week lows.

Along with the US dollar, the yen suffered last week from a shift towards tighter monetary policy by central bank officials outside the US, and many had expected the Reserve Bank of Australia to fall in line with the trend. But the central bank’s neutral stance on rates was broadly unchanged, and the Aussie dollar, up in earlier trade, sank in response.

Sweden’s Riksbank also stuck to forecasts for rates not to rise until the middle of next year and said that, although it did not expect to cut borrowing costs again, it did not rule it out, pushing its crown currency lower.

The yen, also helped by Asian investors seeking safe havens for their money after a missile launch by North Korea, rose about one-third of a percent against both the dollar and the euro.

The Australian dollar, which hit almost four-month highs in last week’s moves, fell 0.8% on the day to $0.7599.

Although the dollar slipped against the yen, it stood firm at 96.256 against the basket of six major currencies used to measure its broader strength. That followed its strongest daily gain in almost four months on Monday, helped by a bigger-than-expected rise in one US factory activity indicator that propelled the 10-year Treasury yield to its highest since May 16.

The greenback was hit hard last week as expectations increased that central banks in Europe and Canada would eventually shift to tighter monetary policy. But a number of analysts have begun to highlight the chances of European Central Bank (ECB) policymakers expressing concern about euro appreciation – or simply dialling down any more rhetoric on tightening – if the currency climbs much higher.

“Last Thursday, euro sentiment reached an extreme, with 93% of traders bullish, before settling down to 82% yesterday,” Morgan Stanley analysts said in a note. “The last time the index reached this high was in February 2013, causing the ECB to intervene verbally. We expect a euro downward correction, but the magnitude of the anticipated correction will be moderate.”

Despite that call, the US bank recommended buying into any break for the euro above $1.1450. – Reuters