The Australian dollar was mired just above three-month lows against the rebounding US dollar on Monday, with a deepening apathy towards riskier assets also causing investors to turn sour on the local currency.
The Australian dollar had hit three-month lows in offshore trade on Friday, falling as far as $0.8603 as investors veered towards the US dollar after strong inflation data trimmed hopes of further rate interest rate cuts from the Federal Reserve.
It extended the rally in Asian trade on Monday, hitting a two-month high against a basket of currencies, before slipping as market players took profits. "Rising US bond yields and falling equities have proved a recipe for US dollar buying in the short-term, since rising yields have reduced the attractiveness of selling the greenback," said Sue Trinh, senior currency strategist at RBC Capital.
"The rise in risk aversion amid the Wall Street sell-off has prompted end-of-year repatriation flows by US investors, slamming carry trades," she added. Adding to the nervousness was news that Australia's Centro Properties Group was having trouble refinancing A$1.3 billion in maturing debt and may have to restructure because of the fallout from the US subprime crisis, sending its shares tumbling over 70 percent. Equitie markets have become a barometer of risk appetite in recent months and any fall tends to weigh down on higher-yielding currencies like the Aussie and New Zealand dollars.
The Aussie was at $0.8616/20, down 1.8 percent from $0.8767/72 late here on Friday. It had risen to a 24-year high of $0.9401 early last month, buoyed mainly by divergent monetary policies in the United States and Australia.
The spread between two-year US and Australian government bond yields eased to 351 basis points on Monday from 354 points on Friday, dampening some of the Aussie's yield attraction.
The Aussie slipped to 97.41/51 yen from 98.56/66 on Friday and down more than 2 percent from its recent peak of 100.02 struck last week as investors unwound carry trades. Carry trades involve borrowing in the cheap Japanese currency to invest in high-yielding currencies such as the Aussie. Growing risk aversion has seen banks hoard cash, leading to a jump in interbank rates. Australia's central bank injected A$700 million through repos on Monday.