The Australian dollar eased on Tuesday, taking a breather from its recent rally, although investors remained optimistic over the currency amid mounting concerns about the United States' fiscal troubles. The US dollar has taken a beating in the past week as investors shunned US assets on fears ballooning deficits will cost the United States its AAA-credit rating, as well as worries the US Federal Reserve may buy more securities.
"The US dollar weakness took a bit of a backburner today, but having said that the uptrend for the Aussie remains intact given a recovery in the global economy and reduced demand for US government bonds," said Joseph Capurso, currency strategist at Commonwealth Bank.
The Aussie was at $0.7785, down from $0.7812 late here on Monday and off a eight-month high of $0.7867 hit late last week. It has gained over 7 percent this month. News that global miner Rio Tinto has agreed to a 33 percent cut in iron ore contract prices with Japan's Nippon Steel Corp was seen as a positive for the Aussie as many in the market had expected a sharper reduction.
Australia is a big exporter of iron ore and the currency has benefited from a boom in commodity prices until the middle of last year. The rebound in the Aussie has been underpinned by a combination of renewed US dollar weakness, stronger commodity prices and the relative strength of the Australian economy, analysts say.
"With the US dollar likely to see further downside, commodity prices on the rise again and the Australian economy providing a relatively attractive investment destination it's likely the upswing in the Aussie has further to go," said Shane Oliver, chief economist at AMP Capital.
"A rise to around $0.85 by year end is now quite likely." While the Australian economy is considered to be in a recession, it is far shallower than most advanced countries. The Aussie slipped to 73.76 yen from 74.28 late here on Monday, reflecting some easing in the recent spike in demand for riskier assets and leveraged carry trades.