The Australian dollar pulled away from one-year highs on Friday, but found solid support just below 87 US cents as investors remained confident about an economic recovery and that US rates will stay at rock-bottom levels. The battered US dollar received a bit of a reprieve on Friday, with the dollar index rising from one-year lows on short covering, but the broad downtrend remained intact after a batch of mixed economic numbers.
The Aussie was at $0.8704 by Friday evening, climbing from a session low of $0.8680, but off a one-year high of $0.8776 hit on Thursday. Lower stocks and commodities also took some of the wind from the high-flying Aussie. It has around 2 percent in the past two weeks, helped by expectations of rising local interest rates, improved investor confidence in riskier assets and higher commodity prices.
The US dollar index has shed around 2 percent this month on mounting speculation the greenback was fast becoming the preferred funding currency for carry trades. "The US dollar has achieved "funding currency" status with zero interest rates and ample liquidity across the financial system," said Warren Hogan, chief economist at ANZ.
"Investors are borrowing money in dollars, usually on very short terms to buy into "risky" trades; in essence a carry trade. It is this dynamic that will see short-term fluctuations in the US dollar highly correlated with risk appetite."