The Australian dollar leapt after Australia's central bank surprised markets with a rate hike on Tuesday, leading the US dollar to give back gains in ranges that tightened ahead of the Federal Reserve's policy meeting. The Reserve Bank of Australia raised its cash rate by a quarter of a percentage point to 4.75 percent as a pre-emptive strike against inflation, sending the Aussie dollar up 1 percent on the day to re-test parity with the US dollar.
The Aussie is expected to struggle around $1.0004, a peak in October which was its highest since its 1983 float. With uncertainty before Wednesday's Fed decision, it might not make much headway near term, but analysts expect the RBA to increase rates again next year, keeping the Aussie buoyant.
"Ahead of the (Fed) decision we're going to see some reduction in risk and if you were to pick out crowded positions in the market, the Aussie and Treasuries are probably the two big ones," said Robert Ryan, FX strategist at BNP Paribas in Singapore. The Australian dollar rose 1.1 percent on the day to $0.9980, charging up as far as $0.9993 at one point, and it gained 1.2 percent to 80.37 yen.
The Fed is widely expected to announce a second round of monetary easing on Wednesday, with markets generally priced for the central bank to commit to buying at least $500 billion in Treasury debt over the coming months to spur a flagging economy. Much uncertainty surrounds the scope and pace of bond purchases, however, leaving the dollar vulnerable to choppy moves in prevailing ranges.
"If the Fed's purchase is smaller than $500 billion, there will be more dollar buying in the near term, though I suspect the dollar will remain under pressure on expectations that the Fed will eventually expand its asset purchases," said a trader at a US bank. The dollar edged up 0.1 percent to 80.56 yen, though still in sight of the record low of 79.75 yen set in 1995.
Markets kept a wary eye on the currency pair, with the risk of Japanese intervention to weaken the yen expected to mount if the dollar slips below 80 yen. The euro, which again failed to hold above $1.4000 overnight, retreated to $1.3933, still up 0.3 percent on the day. The euro fetched 112.24 yen, up 0.3 percent on the day but not far from a five-week low of 111.53 yen hit on Friday. The dollar index, a measure of its performance against six major currencies, slipped 0.3 percent to 77.087.