Calls for a lower dollar by the RBA governor are taking effect, writes Glenda Kwek.
The Australian dollar is set to record its eighth straight week of declines following further calls from the Reserve Bank for a weaker currency, and as improving US economic data increased the chances of a reduction to the Federal Reserve's stimulus program next week.
The currency fell almost US1¢ on Friday morning after RBA governor Glenn Stevens said he wanted the dollar closer to US85¢.
It reached a four-month low of US89.16¢ and was buying US89.30¢ in late trade. The fall saw the dollar close in on the year's low of US88.48¢ struck in late August.
Mr Stevens, who along with other Reserve Bank officials has in recent weeks said a lower dollar was needed to support the economy as it made a transition away from mining-led growth, added that he would be surprised if the currency did not fall further.
"I thought 85 would be closer to the mark than 95 at the time we started to make some comments some months ago," Mr Stevens told The Australian Financial Review.
"I just think that if things over the medium term evolve as we're presently assuming - and I think it's reasonable to make these assumptions - it's going to be surprising if a nine at the front is the right number."
The central bank's jawboning started in late October after the local dollar rose to US97¢ just weeks after falling to the year's low. The currency has since fallen by almost 8 per cent.
The dollar shed 3.7 per cent of its value in November, its biggest monthly fall since June.
It has fallen by about 1.94 per cent this week.
At the same time, data released on Friday showed that US retail sales in November rose by a larger than expected 0.7 per cent, boosting signs the economy was strengthening and that the Fed was likely to start winding back its $US85 billion a month ($95 billion a month) bond-buying program sooner rather than later.
"It clearly does suggest that the US economy seems to have weathered the debt ceiling-government shutdown period well," Westpac chief currency strategist Robert Rennie said.
"We are seeing clearer signs of momentum in retail sales [and] employment coming into the end of the year.
"What that does ... is it certainly raises the tempo surrounding the tapering debate and we get an [Federal Open Market Committee meeting] as soon as next week, so that certainly is something that has benefited the US dollar and hit the [Australian dollar]."
Mr Rennie said recent local news, such as the announcement of Holden's 2017 exit from manufacturing in Australia and equity falls on the back of corporate guidances, also weighed on the dollar.
The downward pressure on the currency is not expected to abate next week, with Treasurer Joe Hockey expected to reveal the troubled state of the federal budget in the Mid-Year Economic and Fiscal Outlook on Tuesday.
On the same day, the Reserve Bank is set to publish its December board meeting minutes, while Mr Stevens will appear before a House of Representatives committee in Canberra on Wednesday.
The much-anticipated statement from the US Federal Reserve's FOMC meeting will be released early Thursday morning.
Financial markets are pricing in a higher chance that the Fed will start to trim its asset-purchases program next week, although analysts said a tapering beginning in early next year was still more likely.
The Australian currency has also struggled against the New Zealand dollar, and was trading at five-year low levels this week. It was buying $NZ1.0858 late Friday.
It could fall even further against the New Zealand dollar next week when the country releases its third-quarter GDP figures, with the new data potentially reinforcing expectations of a near-term hike in interest rates.
The RBNZ maintaining a tightening bias as it kept New Zealand's cash rate on hold at 2.5 per cent at its monthly meeting on Thursday.
"We expect [the Reserve Bank of New Zealand] to begin an aggressive tightening cycle that starts in March of next year, and that would be 100 basis points per year for the next two years," Mr Rennie said.
"So what we will see in coming years is a significant yield premium developing in the New Zealand dollar versus the Australian dollar.
"From a financial market point of view, there is an element of substitution, certainly in the Uridashi market and in higher-yielding, safe, fiscally astute government bond markets ... and that's something that tends to weigh on the Australian dollar."