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The Australian dollar recovered from a one-week low on Friday, helped by a pick-up in risk appetite after Asian stocks bounced, but a worsening global economic outlook is expected to limit gains. Japan's Nikkei pared losses and US stock futures pointed to a firm start, boosting demand for higher-yielding currencies and leveraged carry trades.
The improved appetite for riskier assets came as dollar funding costs continued to drop in Asia. "Virtually all measures of risk aversion continue to trend lower, with abating funding pressures leading the way," said Sean Callow, currency strategist at Westpac.
"The medium-term backdrop remains poor for the Australian dollar. We note the market is pricing in a cash rate of close to 3.5 percent by the middle of next year and commodities are arguably priced in for a global recession." The Aussie recovered to 65.34 yen from a low of 63.37 yen and slightly lower than 65.63 yen late here on Thursday as the unwinding in carry trades took a breather.
The Aussie had recovered to $0.6708 from a session of low $0.6545 and marginally lower than $0.6724 late here on Thursday. Still it was down about 4 percent from a two-week peak of $0.7015 struck on November 4. It has fallen from those highs as nervous investors unwound risky trades and worries mounted that a global downturn will sap demand for commodities, of which Australia is a big exporter.
Commodities ended sharply lower on Thursday after another raft of US data provided further evidence of a looming recession in the world's largest economy. More proof of weakness could emerge later when the employment report for October is released. The US economy is expected to shed 200,000 jobs.

Copyright Reuters, 2008

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