Dollar loses ground as global slowdown fears rise

FEARS about a slowdown in global economic growth spilled over into currency markets yesterday, the Australian dollar slipping against its major trading peers as large falls in mining and energy stocks weighed heavily on the sharemarket.

By InvestSMART · 16 Dec 2011

By InvestSMART ·
16 Dec 2011

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The S&P/ASX 200 Index fell 50.7 points, or 1.2 per cent, to 4139.8. The broader All Ordinaries Index fell 52 points, or 1.2 per cent, to 4197.8.

The local bourse has lost 4.2 per cent in value since December 5, when it sat at 4139.79 points.

Yesterday it finished in the red for the third straight day amid concerns about Europe's inability to deal with its liquidity and solvency problems and as industrial production in the euro zone proved weaker than expected.

Economists warned Europe could be heading into recession and the dollar slipped to $US0.9885, down from $US0.9910 the previous day. At close of trade, the euro was $US1.2981 against the greenback, down from $US1.2983.

Despite business conditions in China beating expectations - the Chinese manufacturing purchasing managers' index hit a two-month high - the news failed to outweigh concerns about Europe.

The Australian dollar lost ground against the euro, slipping to ?0.7608 from ?0.7633.

"The Australian dollar has been underperforming the euro in periods of high volatility throughout this crisis and now that we've morphed into a concern about growth and European sovereigns it makes more sense," a senior currency strategist at National Australia Bank, Emma Lawson, said.

BHP Billiton fell 64? (or 1.79 per cent) to $35.06 and Rio Tinto fell $1.76 (or 2.79 per cent) to $61.40, while Fortescue Metals was 16? lower (or 3.41 per cent) at $4.54.

Among the materials, the gold stocks were some of the worst performers, Newcrest Mining losing 93? (or 2.92 per cent) to $30.88. Energy stocks also fell, led by Woodside Petroleum, which slipped 53? (or 1.68 per cent), to $31.10.

In more gloom for the retail sector, JB Hi-Fi issued a profit downgrade after the market closed. The firm said in a note to the ASX it expects earnings before interest and tax for the half year 2012 to be around 5 per cent below its first half last year. Before the warning, the electronics and entertainment retailer had lost 24? (1.57 per cent), to $15.

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Frequently Asked Questions about this Article…

Why did the Australian dollar lose ground against major currencies?

The Australian dollar slipped as fears of a global economic slowdown and worries about Europe’s liquidity and solvency problems hit currency markets. The article notes the AUD fell to US$0.9885 from US$0.9910, and also weakened versus the euro to 0.7608 from 0.7633, as investors reacted to weaker-than-expected euro‑zone industrial production and recession concerns.

How badly did the ASX fall during the sell‑off and what does that mean for investors?

The S&P/ASX 200 dropped 50.7 points (1.2%) to 4,139.8, and the All Ordinaries lost 52 points (1.2%) to 4,197.8. The local bourse had lost about 4.2% in value since December 5. For everyday investors, that highlights how quickly market sentiment can shift when global growth and sovereign‑debt worries pick up.

Which sectors led the market decline and which stocks were hardest hit?

Mining and energy stocks were the biggest drags on the market. Materials, especially gold stocks, were among the worst performers — Newcrest Mining fell about 2.92% to $30.88 — while energy was led lower by Woodside Petroleum, which slipped about 1.68% to $31.10.

How did major miners like BHP Billiton, Rio Tinto and Fortescue perform in the downturn?

Major miners fell notably: BHP Billiton dropped about 1.79% to $35.06; Rio Tinto fell $1.76 (about 2.79%) to $61.40; and Fortescue Metals was down roughly 3.41% to $4.54, reflecting the sector’s sensitivity to global growth fears.

Did any positive economic data offset the market weakness, for example from China?

Although China’s manufacturing purchasing managers’ index hit a two‑month high and beat expectations, the article reports that this positive news wasn’t enough to counteract concerns about Europe, so markets and the Australian dollar still weakened.

What happened with JB Hi‑Fi and how did the market react to its profit downgrade?

JB Hi‑Fi issued a profit downgrade after the market closed, saying it expects earnings before interest and tax for the half year 2012 to be around 5% below its first half last year. Before the warning, the retailer’s shares had already slipped about 1.57% to $15.

How did the euro and US dollar move during this period of market stress?

The US dollar eased slightly and the euro showed small moves against the greenback: the Australian dollar was reported at US$0.9885 (down from US$0.9910), while the euro was US$1.2981 (down from US$1.2983). The AUD also weakened against the euro to 0.7608 from 0.7633.

What do currency strategists say about the AUD’s behaviour in volatile markets?

Emma Lawson, a senior currency strategist at National Australia Bank, said the Australian dollar has tended to underperform the euro during periods of high volatility. With current concerns focused on growth and European sovereign risk, she explained it makes sense that the AUD would lag the euro in this environment.