Australian Dollar Recovers From Dip Below Parity

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August 8th, 2011

AFTER falling below parity for the first time since March, the Australian dollar recovered over two US cents in afternoon trade to push back above one US dollar.

AFTER falling below parity for the first time since March, the dollar recovered over two US cents in afternoon trade to push back above one US dollar.

The turbulent ride came as nervous investors tried to make sense of the United States' credit rating downgrade.

At 5pm (AEST) today, the dollar was trading at 102.25 US cents, down from 103.55 US cents yesterday.

Since 7am (AEST), the local unit traded between a low 99.29 US cents and a high at 102.57 cents.

It hit a peak of 110.81 US cents on July 27, a record high since it was floated in December 1983.

CMC Markets analyst Ben Le Brun said the Australian dollar rebounded since midday, possibly related to the release of better than expected Chinese manufacturing data.

Mr Le Brun said investors had overplayed their hand in selling risk assets and markets were oversold.

"Everyone has had a reality check and realised we are pricing in a worst case scenario," he said.

"The fundamentals and data we are seeing just doesn't support a US recession."

Share and currency markets have tumbled and bonds rallied since Standard & Poor's reduced America's credit rating late on Friday from the top notch AAA to AA plus.

Investors are now poised to see whether the US Federal Reserve would announce some sort of easing of monetary policy overnight.

This could be quantitative - the buying of bonds from banks - as the US central bank's key interest rate is already between zero and 0.25 per cent.

"It might be that markets are pricing in some sort of new stimulus measures, but I don't think that is going to happen," Mr Le Brun said.

"The Fed Reserve is running out of bullets in terms of the money they have at their disposal to spend and I don't think an equity market slump would be a reason to start pressing the trigger."

At 5pm (AEST), the dollar was at 79.09 Japanese yen, down from yesterday's close of 80.54 yen, and at 71.67 euro cents, down from 72.08 euro cents.

Meanwhile, the Australian bond market ended a volatile day firmer as traders await reassurance from the US Federal Reserve tonight.

At 4.30pm (AEST) on today, the September 10-year bond futures contract was trading at 95.425 (implying a yield of 4.575 per cent), up from 95.380 (4.620 per cent) yesterday.

The September three-year bond futures contract was at 96.150 (3.850 per cent), up from 96.140 (3.860 per cent) previously.

JP Morgan interest rate strategist Sally Auld said low volumes indicated investors were sitting on the sidelines rather than trade a "very, very volatile" market.

"This market is so volatile, people have no true sense of whether it is going to go up or down, so people don't want to own any risk in this situation," Ms Auld said.

Three-year bond futures traded between a high of 96.57 (3.43 per cent) and low of 96.04 (3.96 per cent) over the course of the day.

A trading range of 53 basis points in one day was "virtually unheard of," she said.

The RBA's trade weighted index was at 73.4, down from 74.2 yesterday.