Dollar surges as Summers exits Fed race
The Australian dollar lifted to its highest level since mid-June and stockmarkets around the world rallied after former US treasury secretary Larry Summers pulled out of the race to replace Ben Bernanke as Federal Reserve chairman.
Despite being widely seen as the leading candidate to succeed Mr Bernanke, opposition among some Democrats ultimately forced Mr Summers out of the race.
This has prompted markets to focus on the other leading candidate, vice-chairwoman of the Fed Janet Yellen, who has played a significant role in the organisation's quantitative easing (QE) policy - of buying bonds to keep interest rates low - which has fuelled financial markets and weakened the US dollar.
"There was less certainty around the policy outlook under Summers, relative to Yellen, who played a significant role in current Fed policies and communications," Deutsche Bank currency strategist John Horner said.
The Australian dollar shot up more than 1 per cent after US President Barack Obama confirmed Mr Summers' withdrawal early on Monday.
After starting the local session at US92.45¢, the dollar traded as high as US93.94¢, before pulling back to US93.24¢ late on Monday. Australia's benchmark S&P/ASX 200 Index hit a fresh five-year high, lifting 28.4 points to 5248. The Aussie surged 4.8 per cent in September but is still down more than 10 per cent from 2013 highs.
Fed stimulus programs have contributed to lifting the Australian dollar through the global financial crisis, with the local currency rising from US60.09¢ in October 2008 to as high as US110.81¢ in July, 2011. The dollar has since traded well above its historical average of about US93¢.
Another factor contributing to the dollar's strength was Australia's mining boom and the relatively high interest rates this sparked.
Mr Bernanke has previously signalled his intention to wind QE back should the US economy continue to meet certain benchmarks for recovery, but the timeline and severity remain speculative.
Market pundits have taken Mr Summers' withdrawal as a sign Ms Yellen has one hand on the Fed chairmanship, but the US government has made no such signal.
As the US economy recovers, the US dollar is expected to strengthen against the Aussie, but should Ms Yellen become the next Fed chairman, markets expect a slower and softer touch to the ending of QE, which will support the Australian dollar in the short term.
As the US economy recovers, the US dollar is expected to strengthen against the Aussie. While the dollar is not expected to fall anywhere near its post-GFC low, economists expect the local currency to fall below US90¢ once the Fed begins tapering its stimulus.
Adding to volatility is the coming Federal Reserve meeting, where board members are expected to initiate tapering of the central bank's $US85 billion bond-buying program.
But disappointing economic data out of the US, including soft retail sales and consumer confidence hitting a five-month low, has added to uncertainty surrounding the meeting.
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