The Australian dollar rose to its highest in two weeks against a weak US currency on Tuesday, ahead of a widely expected interest rate cut by the Federal Reserve and as risk aversion took a breather.
Demand for carry trades, where buying of higher yielding currencies is funded through borrowing in the cheaper yen, lifted the Aussie to a three-week high against the yen. The Aussie rose to as high as 99.36 yen, its highest since November 19, as appetite for risk resurfaced after taking a battering in the past few days. "The weak US dollar dynamics along with some easing in risk aversion have helped the Aussie," said Sue Trinh, senior currency analyst at RBC Capital.
"But whether the Aussie can hold on to its gains or not is largely contingent on the market's reaction to the Federal Reserve's interest rate decision. Should the Dow rally on the rate announcement, we could a similar move in the high yielders."
Equities have become a barometer of risk appetite and any rally tends to help the cause of higher-yielding currencies like the Aussie and Kiwi dollars. Regional stocks took their cue from Wall Street where shares were bolstered by news that international investors had stepped in to rescue beleaguered financial firms.
UBS, amongst the biggest subprime casualty to date, announced a $10 billion write-down and a massive injection of funds from Singapore and the Middle East. Singapore is taking a 9 percent stake in UBS in a deal that mirrors action taken by US based Citigroup. The Australian dollar was at $0.8884/87, up 1.4 percent from its level late here on Monday. It had fallen to $0.8644 on December 5, its lowest since September 25.
Also helping the Aussie dollar was a recovery in gold prices. Spot gold was quoted at 807.40/808.20 an ounce in Asian trade, having risen to as high as $812.20 in New York trade where it gained more than 1.5 percent over Friday. Australia is a big producer of gold.
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