The Australian dollar ended off the day's lows on Thursday, drawing support from a strong euro rally against the US dollar, but sentiment toward the Aussie remained weak as investors moved into risk aversion mode.
When markets turn risk averse, demand for high-yield products dries up. Rising risk aversion sparked a major sell-off on Wall Street this week, with Australia's stock market following suit.
The Aussie dollar dropped from near multi-year highs against the euro and also sold off against a re-invigorated Swiss franc, a classic safe haven for the risk averse.
The Aussie was $0.7574/79 compared with $0.7600/05 late here on Wednesday. The Aussie fell as low as $0.7552 in early trade. The next support level is expected around $0.7525. Resistance is seen at $0.7610, with the euro expected to determine immediate direction.
"A significant stock market correction has commenced that will impact other asset classes. The correction is part of a global asset re-allocation by major overseas fund managers," said Peter Pontikis, strategic analyst at Suncorp Metway.
"The Australian dollar will be under pressure to nudge the lower end of its year's range near the $0.7400 level," he said.
The US dollar has rallied in recent weeks as evidence of inflation fuelled expectations of more aggressive tightening by the Federal Reserve than previously anticipated. But the US currency faltered on Thursday after US data revealed that growth in the services sector slowed sharply last month, while prices surged.
UBS currency strategist Ashley Davies said a mix of stronger inflation and weaker growth complicated the US dollar outlook and, if sustained, was likely to fuel further strength in the euro and weakness for commodity currencies such as the Aussie.
"The impact on the commodity currencies is unambiguously negative as higher inflation risks will trigger greater uncertainty over the Fed outlook and contribute to higher risk aversion," Davies said.
Analysts have ramped up expectations for US interest rates, also eroding the attractiveness of the Aussie for those chasing yield.
"The overnight decline was deeper than we expected but the outlook remains bullish while $0.7527 support holds," said Craig Ferguson, senior currency strategist at ANZ Investment Bank.
However, a breach of that level would likely prompt a retest of $0.7470 and then $0.7370 on a longer-term view, he said.
The Aussie remained weak against the kiwi dollar.
The Aussie/kiwi cross rate revisited Wednesday's three-week low of NZ$1.0837, driven by more hawkish interest rate prospects in New Zealand than in Australia and demand for the kiwi dollar from bond investors.
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