The Australian dollar rose broadly on Monday, reaching a five-week against its US cousin on speculation US interest rates would soon start to fall while the momentum for domestic rates remained to the upside. The Aussie hopped up to 84.48 US cents from 84.02 late here on Friday, a long way above the 76.77 trough hit in August, as investors rediscovered some of their appetite for risk.
The calmer mood in part reflected expectations the Federal Reserve will cut the 5.25 percent funds rate at its policy meeting on Tuesday, and quickly follow with further easing.
"We believe that the Fed will lower the fed funds rate by 25 basis points and deliver a statement that maintains an easing bias," said Stephen Walters, chief economist at J.P. Morgan. "We forecast a total of 75 basis points of Fed easing by year-end."
"That the Fed is taking the lead is no surprise," he added. "A main source of the financial turmoil is the weakness of the US housing market, a sectoral drag not present elsewhere." Indeed, Australia's central bank still has a bias to tighten policy, as does the Bank of Japan and the European Central Bank.
As the outlook for official rates has diverged, US yields have fallen well below those in Australia making the local currency more attractive. Two-year yields here are now 220 basis points above those in the United States, compared to 150 basis points in late July.
Three-year Australian bond futures added 0.015 points to 93.840 on Monday as the September contract expired and the market rolled over into the December contract. The December 10-year contract was unchanged at 94.090.
Bill futures held Friday's sharp gains after the September contract expired amid tentative signs of an easing in funding pressure in the interbank market. The relative strength of the domestic economy was highlighted by Standard & Poor's when it affirmed the country's triple-A credit rating on Monday.
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