Dollar surges as Summers exits Fed race
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.
More reports —Page 23
Frequently Asked Questions about this Article…
Markets reacted to Larry Summers pulling out of the race to replace Ben Bernanke by shifting expectations about Fed policy. With Summers gone, traders focused more on Janet Yellen — seen as more likely to continue current Fed stimulus policies — which reduced uncertainty around a quicker tightening of policy and pushed the Australian dollar higher.
Summers' exit tilted market talk toward vice-chairwoman Janet Yellen. Because Yellen has played a significant role in the Fed's QE bond‑buying program, pundits saw her as likely to take a slower, softer approach to ending QE, at least in the short term — a scenario that supports risk assets and the Australian dollar.
The Aussie opened the local session at about US92.45¢, rose as high as US93.94¢ after the announcement, and later pulled back to around US93.24¢ late on Monday, according to the article.
Australia's benchmark S&P/ASX 200 Index hit a fresh five‑year high, rising 28.4 points to 5248 on the same session that the Australian dollar strengthened.
The article notes Fed stimulus has helped lift the Australian dollar through and after the global financial crisis: the AUD rose from about US60.09¢ in October 2008 to as high as US110.81¢ in July 2011, and has generally traded above its historical average of roughly US93¢ since.
Yes. Economists cited in the article expect the AUD to weaken when the Fed starts tapering. They specifically expect the local currency could fall below US90¢ once the Fed begins to reduce its $US85 billion monthly bond‑buying program.
Besides Fed policy, the article points to Australia's mining boom and relatively high local interest rates as contributors to the Aussie dollar's strength, along with favourable global market sentiment after the Fed chair uncertainty eased.
The coming Fed meeting itself is a source of volatility as members were expected to initiate tapering of the $US85 billion bond‑buying program. At the same time, weaker US data — such as soft retail sales and a dip in consumer confidence to a five‑month low — added uncertainty around the timing and scale of any tapering, which can swing AUD movements.
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