The Australian dollar's rally to 7-month highs ground to halt on Tuesday as recent selling pressure on the US dollar eased ahead of an expected interest rate rise by the US central bank on Wednesday. The Aussie shed around half a US cent from its previous close, extending a pullback from Monday's 76.40 cent peak after the local central bank indicated it was unlikely to raise its cash rate this year.
The AUD was $0.7565/70 compared with $0.7602/07 late here on Monday.
The USD made a minor recovery after the European Central Bank President Jean-Claude Trichet said the euro's recent rise was "brutal" and unwelcome. USD dollar weakness had seen the euro spike to a record high this week.
Recent USD weakness has given the Aussie a major lift, despite dwindling expectations of higher domestic interest rates and commodity prices retreating from their highs.
"Clearly the AUD is retracing, however, only below $0.7540/0.7500 would suggest a larger downside move unfolding," said ANZ Investment Bank strategist Craig Ferguson.
The Federal Reserve is widely expected to lift the fed funds rate to 2.0 percent from 1.75 percent after Wednesday's policy-setting meeting. There is now also a growing expectation that it could also tighten in December following Friday's strong payrolls report.
With the Reserve Bank of Australia in no hurry to lift rates, this could see the commodity-based Aussie's interest rate premium cut to 300 basis points by the end of the year, down from 350 basis points currently and 425 basis points earlier this year.
Still, National Australia Bank, the country's largest bank by market value, said it still expects the RBA to lift rates in the first quarter of next year.
"Continuing strength in domestic and international activity, together with increasing wage pressures ... still point to the need for a tighter policy stance," said NAB chief economist Alan Oster in the bank's monthly business survey.
The survey showed business conditions remaining strong in October and pointed to annual growth in domestic demand of around 6 percent, putting pressure on prices and wages.
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