Australian dollar off lows

The Australian dollar traded just above three-week lows against the US currency and near six-week lows against the Japanese yen on Tuesday, as deepening turmoil in credit markets kept investors away from high-yielding currencies.
Regional stock markets were lower, following Wall Street, where stocks extended losses on Monday on mounting credit market worries and heightened anxiety that the world's largest economy was already in a recession. Stocks have in recent months become the barometer for risk appetite.
"Risk aversion rising from the intensification of credit strains and a darkening outlook for growth has seen the Aussie lose ground on some crosses," said Tony Morriss, senior currency strategist at ANZ.
"The US dollar should remain under pressure ahead of the next Fed meeting, but any consolidation in the dollar should see the Aussie come under more pressure." The Federal Reserve is expected to resort to aggressive rate cuts when it meets to decide on monetary policy next week.
The Aussie was quoted at $0.9190/92, off a three-week low of $0.9148 struck earlier in the session, but 0.9 percent weaker than the $0.9272/76 late here on Monday. A private sector jobs survey and a business conditions report, which showed some moderation in demand in the Australian economy also pushed the Aussie lower.
The Aussie dived to a fresh six-week low of 92.77 yen, its lowest since January 24, as nervous investors unwound leveraged carry trades where they borrow in the cheaper yen to buy higher yielding currencies. It climbed back to 93.45/55 yen by evening but was still well below the 94.61/71 yen of late on Monday.
The Aussie remained on the defensive against the kiwi, hurt by expectations that the deepening credit crunch could take a bigger toll on the Australian economy than New Zealand's. Australian bond futures took a breather after rising for three straight sessions. The Australian three-year contract lost 0.08 points to 93.790 while the 10-year bond contract fell 0.120 points to 93.785.
Bond investors have been speculating in recent sessions that a sharp tightening in funding costs will lessen the need for further tightening from the Reserve Bank of Australia (RBA) and could even lead to an easing in policy within the next 12 months. That speculation has led the yield curve between the three-year and 10-year government bonds to the positive territory for the first time since August 2006.