The Australian dollar recovered from four-year lows on Tuesday after a surprisingly hefty interest rate cut by the central bank sparked market talk of a co-ordinated easing in monetary policy globally. Bill futures posted their biggest one-day gain ever after investors priced in chances of further rate cuts before the year end as policymakers across the world respond to the worst financial turmoil in decades.
The crisis has intensified in recent weeks as global stock markets slumped and credit markets froze, leaving governments and central banks scrambling to stave off a sharp slowdown in the global economic activity.
The Aussie climbed to $0.7216 against the US dollar, having fallen to $0.7000 just after the Reserve Bank of Australia's (RBA) decision to cut interest rates by an unexpectedly large 100 basis points. The Aussie had slumped to a four-year low of $0.6970 offshore, when panic selling set in, sparked by fears the global economy was heading toward recession. Those fears saw the Aussie suffer its biggest one-day fall since 1985, losing over seven US cents and 10 yen at one stage, compared to Friday's finish.
Against the yen, the Aussie jumped to 74.22 yen from a five-year low 70.27 yen offshore, supported by speculation that the sell-off in global stock markets would prompt major central banks to cut rates sooner rather than later.
Suresh Ramanathan, head of FX strategy, CIMB Investment Bank in Kuala Lumpur said the RBA move increased the possibility of a co-ordinated rate cut by G-10 central banks, led by the European Central Bank, the US Federal Reserve and the Bank of England.
"The bottom line is that this is a strong signal to the market that unified action will come after all." Investors expect the Bank of England will cut at its policy meeting this week and are pricing in cuts from the Federal Reserve and the ECB in the near future. Any co-ordinated rate cut would come just days after the US government's $700 billion bailout package was passed by lawmakers, but question marks remain on how much it will help to revive the US economy and the battered financial sector.
Although Australia's economy has weathered the financial market turmoil well, a considerably soured outlook for the global economy means the country's exports, mainly demand for its natural resources will be hit hard.