RBA rate threat takes heat from dollar

THE Reserve Bank's jawboning on interest rates, and weaker-than-expected retail figures for December, have seen the dollar plunge to its lowest level in 2½ months.

THE Reserve Bank's jawboning on interest rates, and weaker-than-expected retail figures for December, have seen the dollar plunge to its lowest level in 2½ months.

The dollar was trading at US103.53¢ on Wednesday afternoon - a level not seen since November 16 - after shedding nearly a cent since Monday.

Currency strategists said the RBA's decision to keep the cash rate steady this week while admitting it had "scope" to keep cutting rates had pulled the dollar lower.

And the release of December retail sales figures, which showed the first back-to-back declines since May-June 2011, had wiped another half a cent from the value of the currency.

Strategists say the currency has also been struggling against the euro as global investors pull their money out of Australia to invest again in Europe, encouraged by signs that conditions in the region have stabilised.

On Wednesday, the dollar was trading near its lowest level against the euro since December 9, 2011, at 76.25 euro cents, after losing 5.5 per cent in value since early January.

Commonwealth Bank currency strategist Joseph Capurso said the amount of money flowing out of Australia into Europe had been putting pressure on the dollar.

"There's basically two opposing forces: the weak US dollar is supporting the dollar, but the 'unwind' of the eurozone break-up, which has seen [investment] inflows turn into outflows, is putting some downward pressure on the dollar," he said.

Robert Rennie, Westpac's chief currency strategist, said the Australian dollar had been weakening before the Reserve Bank's board meeting on Tuesday, thanks to the global shift of money back to Europe.

"This is a story that has seen global investors massively underweight Europe . . . but now we're seeing signs of regime change, they're switching away from bond-type assets to riskier assets."

Mr Rennie also said the RBA's comment that it had scope to keep cutting rates meant another rate cut was likely. "The market is taking it as a fairly clear sign that the RBA still has an easing bias, and if the history of the last two or three years is to be believed, the chances of the RBA pulling the trigger on another 25 basis point rate cut in either March or April is high," he said.

Evan Lucas, IG Markets strategist, said if Thursday's unemployment figures are disappointing then an interest rate cut could come sooner than expected.

"The dollar is currently trading at US103.5¢ ahead of Australian unemployment data out [on Thursday]," Mr Lucas wrote in a note to clients.

"A poor result here will increase the likelihood of a March rate cut as the RBA holds its dovish view of the Australian economy."

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