Jittery investors move out of struggling $A

Just two months ago, the Aussie was nearing parity with the US dollar. Yesterday it touched US79.83 as negative market news convinced already risk-averse investors to avoid the currency.

Negotiations between troubled US investment bank Lehman Brothers and Korea Development Bank had reportedly broken down, prompting the broader US market's biggest one-day fall in 18 months.

HiFX Foreign Currency Exchange trading director Mike Hollows said the Aussie had capitulated.

"To see it fall 19% in a matter of months . it just doesn't seem to stack up," he said.

The currency reached a 25-year high of US98.49 in mid-July, when it was buying more than yen 102 and euro 0.615.

Mr Hollows said economic weakness in Britain, Europe and parts of Asia was translating into US dollar strength, even though the US economy was also facing serious problems.

"One of the themes that was running around in July and August last year was that the US could fall in a hole and potentially the global economy would continue to march along merrily - well, that's been proven to be fanciful," he said. "It's the better of the evils out there."

While the Aussie has fallen, major commodities have also depreciated over the past two months.

Oil has plunged from near $US144 a barrel to just above $US100 and gold tumbled from near $US970 an ounce to close to $US775 an ounce.

"The value of oil has been directly translated into the value of the US dollar," Mr Hollows said.

RBC Capital Markets senior currency strategist Sue Trinh said the US dollar had been "rallying by default".

Currency markets had been volatile, and speculative money that had been behind the Aussie's rise to parity had disappeared, she said.

But the dollar did stage a minor recovery yesterday, almost touching US81 on rumours that another US investment bank was constructing a Lehman Brothers rescue package.

Lehman Brothers was due to report overnight, after bringing forward the release of its third-quarter results and alerting the market to what it called "key strategic initiatives".

But ANZ senior currency strategist Tony Morriss said that while market events could affect the dollar in the short term, there were fundamental reasons for the Australian dollar's slide.

Besides the strength of the US dollar and the fall in commodities, the Reserve Bank had reversed its stance on interest rates, cutting the official cash rate from 7.25% to 7%.

Lower interest rates, combined with risk aversion, made the Australian dollar less attractive for foreign investors, he said.

In the US, the Federal Reserve has cut its official interest rate to just 2%, with little regard for the effect on the dollar because of the state of the housing market.

This week, the US Government has also taken action to repair the damage, grasping control of mortgage finance companies Freddie Mac and Fannie Mae to prop up the mortgage market.

"There's a sense that the US is being brutal in dealing with some of its economic issues but you'd have to say, with slower economic growth and house prices that are still falling, that there's still enormous economic challenges ahead," Mr Morriss said.

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