Aussie to bottom out earlier

After starting the week at US85.85, the dollar had depreciated more than 5% to US81.03 by yesterday morning.

While the movement is partly explained by the resurgence of the US dollar against all currencies, the dollar also fell to its lowest level against the yen in more than two years.

The came as a weak performance on Wall Street pushed the Australian market down to its fifth consecutive loss. Yesterday, the benchmark S&P/ASX 200 fell 102.4 points to 4877.1, bringing the week's loss to 4.9%.

"The market couldn't seem to shake off that lingering fear of slowing global growth and the continuing credit fallout," CMC Markets senior dealer Dominic Vaughan said.

The initial trigger for the falling currency was the signals from the Reserve Bank that interest rates had reached their peak, a sentiment that became reality on Tuesday when the board decided to rates for the first time in nearly seven years.

The currency plunge went beyond that justified by the rate cut as the effects of weaker commodity prices - the result of a lowering of expectations for global growth - cut demand for the dollar.

Economists at nabCapital now expect the dollar to bottom out earlier, and to a lower level against the US dollar than previously expected. They said that historically the Aussie reached its nadir against the greenback a few months before the end of a period of interest rate reductions. With the official cash rate expected to to 6% by April next year, down from 7% following Tuesday's board meeting, they expect the dollar to reach its low point in the first quarter of next year rather than the last quarter, as previously predicted, and for it to hit a low of US77 rather than US83.

Exacerbating the are falling commodity prices. The London Metal Exchange index, which charts the prices of six primary metals, has ped 7% from a recent high last month and 15% since March. The easing in commodity demand is linked to slowing growth in Europe and a moderation in the breakneck speed of growth in China.

More evidence for the slowing of global growth emerged this week: in the US, construction activity and retail sales fell while jobless numbers rose; in Europe it was retail sales and business conditions that deteriorated while Chinese manufacturing slumped in August, albeit partly due to Olympic-related restrictions.

Though interest rates were kept on hold in Britain this week, markets are pricing in a 1 percentage point cut in the next year, while a cut of 50 basis points is forecast in the eurozone.

The growth slowdown is also putting downward pressure on oil prices, which fell to $US107.30 yesterday, with AMP Capital chief economist Shane Oliver predicting it would continue to fall into the new year.

"Having broken key support around the $US110 level, with the northern hemisphere summer driving season now over, with hedge funds and speculators under immense pressure to cut their long positions and with world oil demand now slowing, a further decline in the oil price is likely over the next six months," Dr Oliver said.

"We have been looking for the oil price to fall back to $US100 a barrel, but it's looking increasingly likely that a slide below this will occur, possibly back to $US85 a barrel."

As for interest rates, Monday's presentation by Reserve Bank governor Glenn Stevens before the House of Representatives Economics Committee will be scrutinised for clues on the strength of the central bank's inclination to cut rates in coming months. Data released next week by the Bureau of Statistics includes retail sales figures for July (Tuesday) and the unemployment rate for August (Thursday), giving more evidence of the likelihood of a soft landing.

KEY POINTS

The Aussie fell more than 5% this week to US81.77.

It also fell to its lowest level against the yen in two years.

Falling commodity prices exacerbate the .