$AUD Opens Weaker Again: Commodity Prices

Submitted by Share Trading on 20 December, 2005 - 10:40

The Australian dollar opened significantly weaker on Tuesday as falling commodity prices and a narrowing interest rate spread with the US weighed on the local unit. At 7am (AEDT), the local currency was trading at US74.04¢, almost three quarters of a US cent below Monday's close of US74.72¢. During overnight trade, it hit a high of US74.71¢ and a low of US74¢.

ICAP economist Simon Barbetti said a number of factors bore down on the local unit, including the continued fall in gold and commodity prices. "The last week and a half, we've seen a retracement of that bullishness that we saw in commodity prices in the early part of December - that weighed a little bit on the Aussie dollar," Mr Barbetti said. "I think it's part of that story of a lot of money leaving Japan to go to commodity currencies and people getting on the back of that and then that eventually coming undone."

The Australian-US interest rate differentials also continued to hold back growth in the local currency. Australian interest rates are largely steady at 5.50 per cent while the US Federal Reserve's rate is at 4.25 per cent with further hikes expected.

"What's really going to be working against it is the interest rate differential, especially if inflation pressures become a little bit more intense than what they expect in the US next year," Mr Barbetti said. "With gold prices and commodity prices generally, we've had a little bit of retracement but generally speaking commodity prices are still fairly supportive of the Aussie dollar. Commodity prices are still supporting the Aussie dollar, and interest rate differentials are undermining that."

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