Australian dollar drops

The Australian dollar fell on Tuesday, extending losses after the central bank cut interest rates more sharply than expected and said domestic activity and spending was likely to weaken on the back of a sharp global downturn. The Reserve Bank of Australia (RBA) cut the cash rate by 75 basis points to 5.25 percent, a 3-1/2 year low.
Investors had been pricing in an easing of 50 basis points to 5.5 percent, with weak data on Monday backing views that the credit crunch was taking a toll on the Australian economy.
It follows a stunning 100 basis point rate cut last month and comes just days after the US Federal Reserve and the Bank of Japan lowered rates. The Bank of England and the European Central Bank are also expected to lower rates this week as they try to stave off the threat of a looming recession in their economies.
"Not surprisingly, the Aussie has taken a hit following the RBA's bigger-than-expected 75 basis point rate cut," said Sue Trinh, senior currency strategist at RBC Capital Markets. "Ultimately, we see risks skewed toward a move to $0.5500 in an environment where global growth momentum is downward, relative rate differentials are moving against the Aussie and where inflows especially from Japanese retail investors are drying up."
The Aussie eased to $0.6638 from $0.6715 before the rate decision and 2.6 percent lower than $0.6816 late here on Monday. It struck a 5-1/2 year low of $0.6007 last month but has gained since then on hopes that a raft of rate cuts by major central banks would help the global economy escape a recession.
Those worries re-emerged after a report showed factory output in the United States fall to its lowest in 26 years in October. That weighed on demand for leveraged carry trades.
The high-yielding Aussie fell to 65.52 yen, from 67.67 yen late here on Monday, as investors favoured the relative safety of lower-yielding currencies and government bonds. The Aussie lost 21 percent against the yen over October as investors deleveraged positions amid extreme risk aversion.