The US dollar approached a 10-month high against a basket of currencies on Friday after a regional Federal Reserve chief said the US central bank could begin easing up on stimulus this summer, sharpening the high-yielding Aussie's fall. Currency markets took their cue from comments by John Williams, the president of the Federal Reserve Bank of San Francisco, who said the Fed could completely exit its easing by the end of the year.
Investors see Williams' thinking as close to that of the Fed's top officials such as Chairman Ben Bernanke and Vice Chair Janet Yellen. "At the previous policy meeting, the Fed essentially said whether it will reduce or expand its bond buying is 50-50. But markets are now suspicious that Bernanke may signal it's something like 55-45 when he testifies in the congress on May 22," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.
The dollar index, which measures the currency's value against a basket of six major currencies, gained 0.4 percent to 83.886, nearing a 10-month high of 84.094 set on Wednesday. A break of its July peak of 84.100 could open the way for a test of 84.929, a 76.4 percent retracement of its fall from the 2010 peak of 88.708 to near a three-year low of 72.696 hit in 2011.
But Mitsubishi's Uchida said barring further evidence the Fed is moving towards scaling back stimulus, the dollar index could peak out around the current level. "US bond prices gained sharply yesterday despite William's comments. Each market has its own interpretation now and there's no broad consensus on the Fed's stance yet," he said. Speculation about the Fed's possible exit from stimulus is having the most pronounced impact on the Australian dollar, which has enjoyed the status of highest-yielding major currency for years.
Having already lost 2.1 percent on the week by late US levels, the Aussie skidded further on Friday, shedding 0.6 percent to $0.9763 to an 11-month low. If it closes below $0.9871, it would mark its first weekly close below its 200-week average since July 2009.
The currency's 5.7 percent tumble this month accounts for nearly all of its 6 percent loss on the year, as a fall in commodity prices in recent months raises concerns about a slowdown in China, the biggest buyer of Australia's natural resources. Against the yen, the Australian dollar lost 0.4 percent to 99.86, its lowest since May 2. The New Zealand dollar sagged in sympathy, dropping 0.4 percent to 83.07 yen. Against the greenback, it dropped 0.6 percent to $0.8124, its lowest in six months.
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