Australian dollar drops in London trade

The Australian dollar fell on Tuesday after a surprise Chinese interest rate rise spurred speculation growth in the world's No 2 economy may slow, while the euro rose against the dollar, boosted by Asian demand. Other major currencies were little affected after China's central bank raised its benchmark one-year deposit rate by 25 basis points to 3 percent.
The hike was its second increase in just over a month as policymakers step up their fight against stubbornly high inflation. While investors have been anticipating a gradual tightening in Chinese monetary policy, analysts said riskier currencies including the commodity-driven Australian dollar would be most vulnerable to such moves.
The Australian dollar fell more than half a US cent after Beijing's announcement to around $1.0120, shedding earlier gains to trade weaker on the day. Near term support is seen at $1.0083, last Friday's low. The euro also dipped on the China rate hike news, but quickly recovered to trade 0.5 percent higher at $1.3648. Traders said Asian investors, including sovereign names, bought the euro as players in the region have been selling the dollar since returning on Monday after the lunar new year holidays.
But gains were muted after much weaker-than-expected German industrial output for December. That followed a dismal industrial orders survey the previous day which had led to a sell-off in the common currency and saw it drop to a two-week low of $1.3508. The dollar struggled across the board, falling 0.3 percent against its currency basket, while shedding ground against the yen to 82.17.
Traders are reluctant to buy the dollar aggressively, after Federal Reserve Chairman Ben Bernanke said last week that the US economy still needs the Fed's help - a stance he is expected to repeat when he speaks on Wednesday.
Still, the dollar is likely to be supported on the back of a spike in US yields. The 10-year US yield hit a nine-month high of around 3.7 percent on Monday, and money markets have started to price in a chance of a US rate hike later this year.
While the euro recovered on Tuesday, it remains well below a 12-week high of $1.3862 hit last week, and analysts say the single currency will struggle to pick up its rally after European Central Bank President Jean-Claude Trichet last week doused expectations for an imminent interest rate rise.