The Australian dollar held firm near two-week highs against the US dollar on Monday, extending its rally into a sixth straight session, helped by widening interest rate premiums for local assets. Also supporting the Aussie was a government report that Australian export earnings were expected to leap 40 percent in 2008/09.
Australia's improving trade balance has been pushing the Australian dollar higher in recent months. The Reserve Bank of Australia has warned that strong exports could put pressure on inflation and interest rates. Futures are fully pricing in one quarter-percentage point rate hike by the central bank in the next 12 months.
In contrast, investors have trimmed expectations of a hike by the US Federal Reserve after renewed jitters about financial institutions resurfaced and weak data prompted a rethink about near-term rate increases.
The Fed starts a two-day policy meeting on Tuesday, and is widely expected to leave the fed funds rate target at 2 percent, after slashing it by 3.25 percentage points since September. The statement accompanying the decision will be closely watched for cues on the future path of monetary policy.
"The market is a bit wary ahead of the meeting with investors getting around to the idea that the Fed would not hike rates as aggressively as had been priced in," said Jonathan Cavenagh, currency strategist at Westpac. "Commodities have also been an important driver and the government's forecast today adds another positive story for the Aussie."
The Aussie was at $0.9541/45 against the US dollar, up from $0.9520 late here on Friday. It rose to $0.9561 during the session, not far from a two-week high of $0.9567 struck in offshore trade. Yield spreads between the two-year Australian and US government bonds expanded to around 452 basis points on Monday from 446 points on Friday as investors trimmed the chances of a US rate hike.
The Aussie slipped from a seven-month high against the Japanese yen as demand for risky carry trades were hurt by lower regional stock markets. Asian stocks took their cue from Wall Street, which was hurt by downgrades to US bond insurers and possible lower credit ratings for major auto companies. The local Aussie eased to 102.51 yen from a seven-month high of 102.79 yen in offshore trade on Friday.
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