The Australian dollar dipped on Monday after China's central bank raised rates at the weekend, and some analysts say the chance of more tightening in China could prompt investors to sell the Aussie after the year-end holidays. The yen also hit a three-week high against the dollar, although thin trading conditions are likely to have exaggerated price moves.
While the market had been expecting Beijing to tighten further, the timing was a surprise as there had been doubts whether it would raise rates before the end of the year. Saturday's move by the Chinese central bank to raise interest rates was the second in just over two months, underscoring its desire to dampen domestic demand and get price pressures under control. Australia has benefited from strong Chinese demand for iron ore and other commodities.
The news knocked the Australian dollar as low as $0.9987 in thin, erratic trade, with many of the region's financial centres on holiday, including Sydney and Hong Kong. The currency later recouped some of its losses to trade at $1.0035, down 0.2 percent from around $1.0053 late on Friday and a six-week high of $1.0067 the day before.
"China looks set to tighten its policy further in the next year, which will have a negative impact on the Aussie given Australia's strong economic ties with China. When many investors come back from holiday next week they may start the year by selling the Aussie," said Yuki Sakasai, a foreign exchange strategist at Barclays Capital.
While Australia's relatively sound fiscal position, its strong growth and higher yields are likely to lure investors, the Aussie may come under pressure particularly against other commodity currencies such as the Canadian dollar, Sakasai said. Thin trading conditions are expected to persist for the rest of the week due to various holidays in many countries. London is closed on Monday and Tuesday while Tokyo will be shut on Friday.
The dollar slipped slightly against the Japanese yen, touching a three-week low of 82.75 yen in thin trade. Although stuck in a range of 82.50 to 84.50 yen, the dollar has been ticking down in the past couple of weeks as holders of long positions have given up hopes of pushing it beyond 85 yen. The euro ticked up 0.2 percent to $1.3144, although it had dipped slightly when traders successfully gunned for stop-loss orders around $1.31.
The euro looks vulnerable due to worries over some euro zone countries' problems with debt financing, but the absence of many market players this week may help the currency hold above last week's three-week low of $1.3055, traders said. The euro has been supported at its 200-day moving average, which stood at $1.3093 on Monday.
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