MARKETS SPECTATOR: The dollar's QE question-mark

The Australian dollar is on track to fall below US90 cents following Federal Reserve Chairman Ben Bernanke saying the US central bank may slow its $US85 billion of monthly bond purchases.

The Australian dollar at 0844 AEST was trading at US92.76 cents, down from US94.85 cents yesterday, according to Bloomberg data. On Monday the Australian dollar was at US95.43.

Bernanke’s comments at a news conference on US bond purchases are seen as “monumental” by Andrew Salter, ANZ’s foreign exchange strategist.

“There has been a sea change in US monetary policy overnight,” says Salter. Since 2008 the Fed has been expanding money supply, flooding the world with US dollars, to try and bring interest rates down to boost a troubled US economy.

The Fed’s actions helped boost currencies such as the Australian dollar. On January 10 it was trading as high as $US1.0598. It has since fallen 12 per cent, according to Bloomberg.

Salter says the Australian dollar could slide below US90 cents. “The momentum is clearly that way,” he says.

But the Fed is watching US economic data very, very closely. If the US labour market deteriorates or other US economic reports show a still weak economy, Bernanke and his colleagues may delay the scaling back of the bond-buying program. If that occurs then the Australian dollar could stabilise or even appreciate against the greenback.

“US monetary policy is not simple,” says Salter. “At the moment there is a binary reaction” to Bernanke’s comments, US dollar appreciation, Australian dollar depreciation, he says. That may not necessarily continue.