Dollar slides into role of whipping boy
Investors rushed out of the risky asset as the US Federal Reserve tipped an end to its stimulus program.
The currency plunged to a 33-month low of US92.62¢, a fall of nearly US3¢, after the statement.
It extended its drop to US92.42¢ shortly before midday on Thursday as new data from China showed its manufacturing sector weakening in June to a nine-month low. Last night it was at US91.93¢.
While other commodity currencies such as the Mexican peso, Brazilian real and South African rand have also declined against the US dollar, the Australian currency - as one of the world's most traded - received special attention from investors, currency strategists said.
"It's become a whipping boy for the broader market turmoil that we are seeing," NAB head of currency strategy Ray Attrill said.
"That's probably why it has fallen almost more than any other emerging-market currency ... people have learnt to use it almost as a proxy for broader risk aversion and as the hedge against, for example, long equity portfolios."
Westpac chief currency strategist Robert Rennie said the dollar was "singled out in recent sessions for some pretty aggressive treatment" and could fall further, with financial markets looking to US91.88¢ as the next psychological barrier.
The recent volatility in the value of the dollar and expectations of a lower interest rate meant the currency was becoming less attractive in the "carry trade", Rochford Capital director Derek Mumford said.
The carry trade involves borrowing currencies with low interest rates and investing in those with higher interest rates. An increase in the volatility of a currency would expose investors to losses.
Frequently Asked Questions about this Article…
The article says the Australian dollar plunged after the US Federal Reserve signalled an end to its stimulus program, which prompted investors to flee risky assets. That sell-off, combined with weaker-than-expected China manufacturing data, drove the AUD down as investors sought safer currencies.
According to the article, the AUD slid to a 33-month low of about 92.62 US cents, extended to around 92.42 US cents before midday, and was at about 91.93 US cents later. Westpac noted markets were eyeing roughly 91.88 US cents as the next psychological barrier.
Currency strategists in the article describe the AUD as a ‘whipping boy’ because investors are using it as a proxy for broader risk aversion. When markets turn cautious, the AUD is often sold more aggressively than other currencies and used as a hedge against long equity positions.
The article reports new Chinese data showing manufacturing weakened in June to a nine-month low. That added pressure because Australia is closely linked to global commodity demand and Asian growth, so weaker China data reduced demand expectations and weighed on the AUD.
Yes — the Mexican peso, Brazilian real and South African rand also declined against the US dollar. But the article explains the AUD received special attention because it is one of the world’s most traded commodity currencies and is commonly used by investors as a proxy for broader market risk.
The carry trade involves borrowing low-yield currencies and investing in higher-yield ones. The article quotes Rochford Capital’s Derek Mumford saying that recent AUD volatility and expectations of lower interest rates make the currency less attractive for carry trades, since higher volatility increases the risk of losses.
NAB’s Ray Attrill said the AUD has been used as a proxy for broader market turmoil and has fallen more than many emerging-market currencies. Westpac’s Robert Rennie said the dollar was ‘singled out’ for aggressive selling and could fall further, noting markets were watching the roughly 91.88 US cents level.
The article highlights heightened volatility driven by the Fed’s move away from stimulus and weak China data. That volatility can expose investors to losses (especially in strategies like the carry trade), so everyday investors should be aware that the AUD may be more sensitive to risk swings and could move lower as markets reassess global growth and policy expectations.
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