Aussie dollar in freefall

Aussie dollar in freefall
GABRIELLE COSTA
May 20, 2010 - 5:20PM
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Economic volatility hits globally
The Australian dollar suffered a free fall as offshore investors ditched what they class as high-risk investments.

The Australian dollar was in freefall this afternoon, plunging to as low as 82.56 US cents against the greenback and falling sharply against other major currencies, on renewed worries about the health of the global economy.

Traders said the losses were caused by global hedge funds selling the dollar to reduce their exposure to currencies considered as risky.

By the time of the local close, the dollar had recovered slightly to 83.15 US cents, still down more than 2.5 US cents from yesterday's close of 85.88 US cents.

TD Securities FX strategist Roland Randall said the unit had been caught in the grip of investor insecurity about the on-going European debt crisis.

''The big picture is the world is selling risk assets in concerns out of Europe,’’ he said. ''We’ve seen the Aussie plummet.''

It's been a shocking month for the currency, sinking more than 10 per cent from 92.7 US cents - a shift that may add to local inflationary pressures as the higher cost of imports flows through the economy.

Shares also extended their recent run of falls to end down 1.6 per cent for the day. Share values are now down more than 10 per cent this month, wiping more than $130 billion from the value of the market.

Currency movements table

Since the start of May, the Aussie dollar has been the worst performer among frequently traded currencies in the world, and is now at its lowest against the greenback since the start of September.

International turbulence stemming from the sovereign debt crisis in Europe - and heightened by Germany's shock move to ban a form of short-selling - has prompted investors to turn their backs on what are often referred to as risky assets, which include the Australian dollar.

The Australian dollar is a high-yield currency - interest rates are higher in Australia than in many other trading economies - so any decision considered to hamper growth in the global economy is deemed a negative for the local currency.

Investors are pricing in a less-than-zero chance of an interest rate rise when the Reserve Bank meets next month and the chance of only one quarter-percentage point rise in the next year.

Until recently the market had suggested as many five rate rises between now and next May.

The local dollar also fell sharply against the currencies of other major trading partners and tourist destinations overnight.

It was buying 75.93 yen at the close, a 10-month low. It is down from 77.81 yen this morning and 87.79 yen at the start of May. The dollar was also worth 57.8 British pence, down on the 60.8 pence it bought at the start of the month.

The dollar is also down against the much-troubled euro. At the close it was buying 66.96 euro cents. Just last week, the dollar hit a record high against the euro, when it was buying 71.78 euro cents. That movement marks a fall of more than 5 per cent in the space of just five trading days, versus a currency itself targeted by sellers.

Westpac senior currency strategist Richard Franulovich said growth assets such as equities and the Australian currency had been under "a lot of pressure" following the moves by the German regulator.

"There is a lot of angst in financial markets, bewilderment and frustration with the decision by Germany to impose a ban on naked selling of all sorts of instruments," Mr Franulovich said from New York.

Short selling occurs when traders bet on a stock or investment that they do not own.

Naked short selling - when a trader has yet to find another party - was cited as a factor in the turbulence on world markets during the 2008 financial crisis.

"That consternation, that fear of what next and the uncertainty it has created has caused a significant bout of risk aversion," Mr Franulovich said.

"Equities were under pressure heavily early in the (New York) session... That coincided with an Aussie currency trading badly and briefly dipping below 84 (US cents)."

BusinessDay, with agencies

http://www.smh.com.au/business/markets/aussie-dollar-in-freefall-20100520-vg2a.html