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Dollar recovers after rates decision

The Australian dollar recovered from a six-week low after the central bank suggested interest rates could remain unchanged for the remainder of the year.

In late local trade, the dollar was buying $US1.0278 US cents, up from a six-week low of $US1.0223 plumbed in early trade.

OZForex senior foreign exchange manager Jim Vrondas said the Aussie dollar remained subdued for much of the day, before rising following the Reserve Bank of Australia’s decision to keep its cash rate on hold at 3.5 per cent.

‘‘The market appears to have taken its lead from the accompanying statement, which inferred that rates will remain as they are for the foreseeable future.’’

Mr Vrondas said that despite a spate of weaker data suggesting another rate cut from the RBA in 2012 was possible, the central bank’s accompanying statement on Tuesday gave no suggestion any further rate cut - causing a relief rally on the Australian dollar.

Concerns about the cancelling or mothballing of some of Australia's biggest mining projects have been taking  their toll on the Australian dollar, with the currency hitting a six-week low today against the greenback.


The dollar's earlier falls came as the trade-weighted index fell to 76.6 overnight, the lowest since June 29. The index is a measurement of the dollar's value when compared to a basket of currencies of Australia's most important trading partners.

“There are a number of factors but I think the most potent is this quite intense focus in the financial press on mining projects being cancelled or delayed,” Robert Rennie, Westpac chief currency strategist, said.

“Then [European Central Bank president] Mario Draghi turned around overnight, in what was supposed to be a closed meeting, to say that the ECB could buy one-year, two-year, or even three-year bonds, and that there's very little monetary financing effect at all in what they're doing.”

Mr Draghi's comments were a sign that there are positive developments afoot in Europe, which weakens the case of those who believe the Australian dollar has become a haven, Mr Rennie said.

“What's the Australian dollar becoming a safe haven from? If it's Europe, then why do you need a safe haven if Europe is about to address its issues?”

Commonwealth Bank foreign exchange economist Peter Dragicevich said the focus on falls in commodity prices and global concerns about the Asian growth story, particularly China, were having an effect.

“You're also getting a lot of headlines about Australia's capital expenditure story, and concerns about that. So I think the market sentiment is just a little bit negative,” Mr Dragicevich said.

“[But] we don't think the fall in the dollar is overly bearish. Our forecasts have been for the Aussie to be at $US1.03 by the end of September for a number of months, so we did expect it to come under some pressure.”

Mr Draghi told the Economic and Monetary Affairs Committee of the European Parliament overnight that the ECB would not be breaking European Union law if it bought bonds from member states.

His comments come just days before the ECB meets on Thursday.

“There is a lot of expectation in the market ahead of the ECB meeting,” Mr Dragicevich said. “[Markets are hoping] the ECB will provide a lot of detail about what they plan to do, and how they plan to buy those bonds."

It comes as the Moody's rating agency moved the EU's triple-A credit onto a negative outlook overnight.