Tuesday, April 03, 2007

Australian dollar surges to 10-year high

Australian dollar surges to 10-year high
By Peter Garnham
Copyright The Financial Times Limited 2007
Published: April 2 2007 11:37 | Last updated: April 2 2007 18:29

The Australian dollar surged to a 10-year high against its US counterpart Monday as strong spending data raised expectations of further monetary tightening from the Reserve Bank of Australia.

Australian retail sales climbed 0.9 per cent in February; consensus forecasts predicted a 0.4 per cent rise.

Neil Mellor, currency strategist at Bank of New York, said the data bolstered the view that the RBA would have little choice but to raise interest rates by 25 basis points to 6.5 per cent in the next few months.

The figures underpinned the RBA’s concerns over inflation; its meeting on May 1 appeared the most likely occasion for a further rise in rates given that the central bank might first want to assess quarterly inflation data, released on April 24.

“However, given the RBA’s concerns and the strength of the spending data, there is always the possibility that it will cut to the chase and raise interest rates at this week’s meeting,” he said.

The Australian dollar jumped 1.2 per cent to $0.8180 against the dollar by mid-afternoon in New York.

Meanwhile, the pound climbed to a two-month high against the dollar as the chances of a near-term rise in UK interest rates grew.

Sterling’s strength came despite a report that suggested UK manufacturing growth slowed in March.

The UK purchasing managers’ index eased from 55.4 in February to 54.4 in March, a larger-than-expected fall.

Howard Archer, at Global Insight, said despite the drop in the headline figure, the report was pretty healthy and would not greatly assuage the Bank of England’s concern that UK companies were becoming more confident in their pricing power and were looking to raise prices.

Meanwhile, data revealed a sharp rise in UK mortgage equity withdrawal in the fourth quarter.

Paul Dales, UK economist at Capital Economics, said the rise reflected UK households’ increasing willingness to translate rising household wealth into a more liquid form of spending power and supported the case for higher UK interest rates.

“A move in May looks most likely to us, although there is a good chance that the BoE will hike rates as soon as Thursday,” he said.

The pound climbed 0.5 per cent to $1.9780 against the dollar and rose 0.3 per cent to £0.6761 against the euro.

The euro rose 0.1 per cent to $1.3370 against the dollar as investors shrugged off a slight dip in the eurozone manufacturing purchasing managers’ index in March.

Aurelio Maccario, at UniCredit, said that, despite the likelihood of persistent softness in the eurozone manufacturing sector over coming months, the eurozone would grow above trend this year, underpinning – along with abundant liquidity – a hawkish stance from the European Central Bank. “We expect the ECB to hike rates three more times by the end of the year,” he said.

The dollar eased 0.2 per cent against the yen to Y117.60 after the Institute of Supply Management’s survey of the US manufacturing sector failed to meet expectations. Alan Ruskin, at RBS Greenwich Capital, said the data revealed a disappointing mix of weaker orders and weaker unemployment while prices paid by US manufacturers was significantly stronger than expected.

“The prices data will provide another indication that the Federal Reserve cannot be complacent on the inflation side even with soft growth,” he said. “The mix remains dollar negative.”

The yen was flat at Y157.30 against the euro, showing little reaction to the quarterly Tankan report, which showed Japanese business confidence deteriorating for the first time in a year.

Ian Gunner, currencies strategist at Mellon Financial, said that, although the Tankan was slightly weaker than expected, it was not sufficiently weak to prompt a shift in Japanese monetary policy.


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