The Aussie Dollar Action Overnight - Inches Forward

Submitted by Share Trading on 5 January, 2006 - 08:19

The Australian dollar opened more than half a US cent stronger on Thursday after its US counterpart succumbed to further selling overnight. At 7am (AEDT), the local unit was trading at US74.77¢, well above Wednesday's close of US74.19¢.

Overnight, it reached a low of US73.98¢ and a high of US74.85¢.

ICAP head of economics and strategy Michael Thomas said the US currency had suffered its largest two-day fall in five years and that the Australian dollar was "just going along for the ride."

Partly driving the move lower in the US currency was the prospect of less local interest rate support, he said. Minutes from the US Federal Reserve's most recent meeting signaled that the central bank might soon halt rate increases, spurring speculation that the interest-rate premium over the US will hold.

The minutes of the Fed's December13 meeting say the number of extra rate increases needed to control inflation "probably would not be large". Eight increases in 2005 drove Australia's rate advantage over the US to a four-year low, causing the currency to drop for the first year infour years.

"At these levels, the Australian dollar is looking attractive," State Street head of research and analysis Harvinder Kalirai said. "A decline in US interest-rate expectations is beneficial for Australia."

The Australian dollar rose to US74.28¢ in afternoon trading yesterday, from 73.59¢ in late Asian trading on Tuesday. Mr Kalirai said it should climb above 80¢ in the next six months.

The Reserve Bank of Australia raised its overnight cash rate target just once last year, to 5.5per cent. The Federal Reserve increased its lending rate at each of the past 13meetings, to reach 4.25per cent last month.

"The data out of Europe are looking a bit better, Japan is looking quite good," Mr Thomas said.

Meanwhile, the Homeland Investment Act - the tax amnesty for repatriating profits in the US - had expired at the end of last year. "So that was a positive for the US dollar that is no longer there," he said. And in another negative for the currency, the US still had a huge current account deficit to deal with, Mr Thomas said.

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