Aussie dollar bursts through $US1.05 – SMH

Posted on April 8, 2011 by

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The Australian dollar has pushed its way through the 105-US-cent mark, matching the predictions of some economic commentators that just a few months ago seemed fanciful.

The currency reached a peak of 105.09 US cents as investors grew more confident about Australia’s economic prospects and the likelihood of another interest rate rise. It was also buying almost 89 yen – near a 30-month high – 73 euro cents and 64.1 pence.

About midday, it had slipped a little to trade at 104.88 US cents.

The latest spike for the currency is considerably higher than the earlier record – which remained unbroken only for a matter of 12 hours – set yesterday after the release of official employment data showed strength in the Australian economy.

And during the offshore trading session, there were also signs the labour market in the US is also picking up.

The Australian dollar has rallied in the past three weeks after central banks from the Group of Seven intervened to prevent the yen rising, and to assist Japan’s recovery from its devastating earthquake and tsunami a week earlier. Investors have been lured by Australia’s relatively high interest rates and the possibility that the gap may widen further before the end of the year if the Reserve Bank lifts its key cash rate.

New York-based 4Cast economist Sean Incremona expects more post-float highs against the greenback in the future.

“The Aussie seems unable to be stopped,” he said. “The most recent better-than-expected employment report (in Australia) has given yet another boost to what has been a strong uptrend supported by favourable yield differentials and soaring commodity prices.”

At the moment, Australian investments provide better yields, or returns, in the eyes of foreign investors because local official interest rates are 4.75 per cent. Elsewhere in many parts of the developed world, they are at or near zero. Demand for Australian investment products creates demand for the currency.

“We could see some more post-float highs, but it could also be setting up for ‘the bigger it is, the harder it falls’ type of a situation if and when there is a turnaround,” Mr Incremona said.

ECB move

Overnight, currency markets were affected by a number of factors, including a decision by the European Central Bank to lift interest rates in the European Union for the first time in three years.

A key index of commodities prices rose to its highest level since the financial crisis was the centre of traders’ attention in September 2008, gold prices broke new ground on inflation fears and the oil price continued its upward trajectory, with the important West Texas Intermediate crude oil rising through $US110 a barrel in New York trade.

Higher commodities prices generally boost the Australian dollar because the currency is very closely linked with the raw materials produced here. Some believe the dollar could now top $US1.08.

ANZ economist Dylan Eades said the Australian dollar had been boosted by risk appetite, which reflects expectations for economic growth.

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Posted in: APAC, USA