Dollar tumbles as US revival gains traction
The dollar fell below US99¢ during Wednesday's session and late in trading was at US98.68¢.
The currency is likely to keep falling, as economists tip US housing data to improve and traders look for any excuse to "sell the Aussie".
It has been a tumultuous two weeks for the dollar, which began the month falling on the Reserve Bank's interest rate cut and rumours that US billionaire George Soros had a large short position against the currency.
Since then, a surge in the US dollar has kept it locked in a downward trend, allowing it to shed almost 5 per cent of its value since the start of May.
Credit Suisse strategist Damien Boey said positive US house-building data overnight was likely to push the Aussie down further.
"There are enough people out there who are willing sellers of the Aussie at this stage, and they are looking for any reason to keep selling it," he said. "If you saw more strength on US data overnight, you could easily see the Aussie fall another cent."
On Tuesday the dollar fell almost half a per cent on the news that the federal government's 2013-14 deficit would be $18 billion.
Signs that the economy was weaker than expected also triggered speculation that the RBA could cut interest rates further.
But Mr Boey and others said the effect of the budget, and fiscal policy more broadly, was a side event to what was happening outside the country.
"Every sell-side broker is saying, 'sell Aussie', with the exception of [Commonwealth Bank]," he said.
ANZ currency strategist Andrew Salter said: "It's not the change in the Australian economy's fundamentals [pushing the dollar down] but a reassessment by the market that the US economy looks better, and that their budget position looks to be improving."
Signs that the US economy was improving have led to speculation about when the Federal Reserve might wind back its stimulus program. This could see the US dollar move even higher, but Mr Salter and Mr Boey said the US economy remained weak and the Australian dollar would stabilise.
Speaking at the National Press Club post-budget address on Wednesday, Treasurer Wayne Swan said there was evidence that non-mining sectors of the Australian economy, such as housing and retail, were responding to lower interest rates.
"Businesses are starting to successfully adapt [to a higher dollar], helping mark the beginnings of a productivity upswing," he said. "Together with the production and export phase of the mining boom - as it continues to ramp up - these will become bigger drivers of growth."
But UBS economist George Tharenou said lower than expected wage data suggested weakening household income and gave the RBA more room to cut the cash rate a further 25 basis points. The wage cost index rose 0.7 per cent, quarter-on-quarter, on Wednesday - the second-lowest increase in 13 years.
Frequently Asked Questions about this Article…
The article says the AUD fell as economists expect signs of improvement in the US economy, particularly stronger US housing data, which boosted the US dollar. Other factors included an earlier Reserve Bank of Australia (RBA) interest rate cut, rumours that US investor George Soros held a large short position against the currency, and broad dealer sentiment to "sell the Aussie."
According to the article, the Australian dollar slipped below US99¢ in the session noted and was trading around US98.68¢ late in trading. It has shed almost 5 percent of its value since the start of May.
Views in the article are mixed. Credit Suisse strategist Damien Boey and many sell-side brokers said the AUD is likely to fall further if more positive US data arrives, noting plenty of willing sellers. However, Boey and ANZ strategist Andrew Salter also cautioned the US economy remains weak and suggested the AUD could stabilise once markets reassess fundamentals.
The article explains that stronger US housing data and signs of an improving US budget position make the US dollar more attractive and can push the AUD down. Market speculation about when the Federal Reserve might wind back stimulus also supports a stronger US dollar, which tends to weaken the AUD.
The RBA's interest rate cut earlier in the month contributed to the AUD’s initial fall. News that the federal government's 2013-14 deficit would be $18 billion coincided with a near 0.5 percent drop in the dollar and fuelled market talk the RBA could cut rates further. That said, some strategists in the article said fiscal news was a secondary factor compared with international developments.
Credit Suisse’s Damien Boey warned there are many sellers looking for reasons to sell the AUD and that stronger US data could push it down another cent. ANZ’s Andrew Salter said the move is more about a market reassessment that the US economy looks better, not a big change in Australian fundamentals. UBS economist George Tharenou highlighted weak wage data — the wage cost index rose 0.7% quarter-on-quarter, the second-lowest increase in 13 years — which could give the RBA room to cut the cash rate another 25 basis points.
Yes. The article notes that signs the US economy is improving have led to speculation about when the Federal Reserve might wind back its stimulus program. If markets expect the Fed to taper stimulus, the US dollar could move higher, which would likely put further downward pressure on the Australian dollar.
Based on the article, everyday investors should monitor US economic releases (especially housing data), US budget and fiscal news, Federal Reserve policy signals, RBA decisions and domestic wage data (like the wage cost index). Also watch market sentiment from sell-side brokers and comments from major banks and strategists, since these can influence short-term AUD movements.
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