The Australian dollar hit a 28-year high against the greenback on Tuesday after a surprise Australian interest rate hike, while the US currency stayed weak on expectations of fresh monetary easing. The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.75 percent as a pre-emptive strike against inflation, sending the Aussie above parity to $1.0013.
It was the second time the currency has scaled parity since it was floated in 1983. The RBA's move increased the interest rate differential between Australia, where rates are rising, and the United States, where the Federal Reserve is widely seen as easing policy further on Wednesday to help stimulate the economy.
Analysts said this view would support the Australian currency while providing one more reason to sell the dollar, which has already suffered on speculation that more Fed easing will further weaken the currency. Investors also anticipated results of US midterm elections, with analysts saying the dollar may initially gain slightly on relief after clearing a hurdle in a week piled high with event risk.
The dollar index was down 0.34 percent at 77.03 against a currency basket. The Australian dollar traded 1.1 percent higher on the day at $0.9980 with near-term gains seen limited by stop-loss orders around $1.0015. The euro gained 0.5 percent to $1.3959, with talk of demand of a semi-official European name helping boost the single European currency. The single currency was also helped by strong German PMI numbers.
Jeremy Stretch, head of currency strategy at CIBC World Markets said the strong German PMI data and uncertainty before the US elections and the Fed meeting could push the euro back above $1.40. The Federal Open Market Committee starts its two-day meet on Tuesday and looked close to embarking on a second round of monetary easing.
The euro was expected to run into resistance at $1.40, traders said. With the euro's triangle holding pattern since mid-October in place, the lower end of the triangle around $1.3750-70 was seen as a support and a good entry point for those betting on a break above the triangle after the Fed meeting. The dollar edged up 0.3 percent to 80.74 yen, though still close to the record low of 79.75 yen set in 1995. The risk of Japanese intervention to weaken the yen was expected to mount if the dollar slips below 80 yen.