Down it goes: $A hits new low

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Down it goes: $A hits new low

By David Potts and John Synnott

A likely interest rate cut of 0.5 per cent on Wednesday sank the Australian dollar to a new low of US48.50¢ yesterday, amid warnings it is on the brink of plunging further.

The Reserve Bank board, under fire from markets for not cutting interest rates quickly enough to prevent a recession, meets on Tuesday under intense pressure.

Economists and markets are calling for a 0.5pc cut, which would immediately flow on to mortgages.

A 0.5pc cut would slice $47 a month off a typical $150,000, 25-year mortgage.

Reserve Bank governor Ian Macfarlane yesterday declined to comment on whether he was feeling the pressure from economic experts to cut the official rate.

"You can ask that, but I won't say anything," he said.

A respected currency strategist with BNP Paribas, Clifford Bennett, the first to predict a US50¢ dollar, said the Australian currency was in major danger of another tumble.

"There is no doubt the currency is in overshooting mode to US45¢," Mr Bennett said yesterday from Singapore.

He blamed a fall in Asian currencies, the current account deficit and uncertainty about the next election result for the battering.

"You have a country running trade deficits when the economy is doing well. What does that mean when things worsen? The risk is it will do even less well in an economic downturn," he said.

Mr Bennett warned that "the perception" was that the Reserve Bank was too conservative with rate cuts and "further behind the curve" than the US and European central banks.

"If the Reserve Bank drops rates by 0.5pc this week, that should support the currency," he said.

"That would give global investors a sign that the bank was becoming more proactive."

In New York the dollar closed yesterday at a record low of US48.50¢ and has since inched up to US48.56¢.

"It's very weak and looks like it's going to be weaker," said one trader with a major Australian bank in New York.

And a trader with the London branch of a major Australian bank said the next target figure there was 47.50, followed by 43.80.

"This week we could see more downward pressure," he said.

Dealers warned our economy was in even worse shape than that of the beleaguered US.

Macquarie Bank currency strategist Jo Masters said: "Markets care about relative growth, we've got an RBA meeting next week and the market wants 50 points [cut].

"I don't know how you pick targets on the downside at the moment."

Schroder Investment Management head of fixed interest Shane Clinton said the low Australian dollar "is doing more for our tourism than the Olympics ever did".

"And at $3 to the British pound, we are hearing of people wanting to sell up over there and move here for the lifestyle," he said.

St George Bank has already slashed its home loan fixed rates to 6.29pc across the board from one to five years and is offering an all-time low honeymoon rate of 4.9pc. NRMA Building Society's 6.19pc for three years is more than 1pc below its variable rate.

John Symond, managing director of one of the biggest lenders, Aussie Home Loans, said official rates would drop to "around 4.5pc by Christmas".

That would mean a 1pc cut in the standard variable rate to 6.3pc, wiping out last year's increases.

Mr Symond predicted fixed term rates would be "sub-6pc as the year progresses".

But some home lenders were more cautious, tipping the Reserve would opt only for a 0.25pc drop.

Retail sales for February are released tomorrow, the last pointer to the economy the Reserve Bank will have before its meeting.

These are expected to be sluggish, although leading retailer Gerry Harvey said yesterday that conditions were bad a month ago but "I'm a bit more optimistic now".

Federal Treasurer Peter Costello yesterday said the level of the dollar did not reflect the true state of the Australian economy.

"The things that are influencing the Australian dollar, [the] US dollar exchange rate at the moment are not reflecting economic fundamentals: a balanced Budget, low inflation and low interest rates are working for Australia," Mr Costello said. "And the exchange rate is not fully reflecting those fundamentals."

Asked if there would be another interest rate cut, Mr Costello declined to speculate.

The Sun-Herald

http://www.smh.com.au/news/0104/01/national/national1.html



-- Martin Thompson (mthom1927@aol.com), March 31, 2001

Answers

- NEWS UPDATE

$A slips below US48c

The Australian dollar has been dragged through the mire overnight, tearing through 48 US cents for another trading session of record lows.

The alltime low for the currency, reached in New York around 6am local time, was $US0.4775.

The reasons for the selloff remains with the US dollar which has been supported by the market's unshakeable faith in the US Federal Reserve and its ability to stave off recession.

Economic data out of the United States last night gave hope that the country will avoid any negative quarterly readings in GDP.

The National Association of Purchasing Management reported a reading of 43.1 in March, better than the 41.9 reported in February.

"It is essentially a US dollar story," Jo Masters, market strategist at Macquarie Bank said.

"This time what you are starting to see is US data look a little bit better and the NAPM survey, while still below 50 which indicates manufacturing contracted, it is an improvement on the previous month."

US stocks fell sharply as well in volatile trade as economic and earnings concerns were intensified by US-Chinese tensions after an American surveillance plane collided with a Chinese fighter.

The Dow Jones industrials skidded 100.85 points (1.02 per cent) to close at 9,777.93 and the Nasdaq tumbled 57.29 points (3.11 per cent) to 1,782.97. The Standard and Poor's 500 shed 14.46 points (1.25 per cent) to 1,145.87.

The market was hellbent on pushing the Australian dollar lower and persistently tested yesterday's low of $US0.4850 in early London trading.

It eventually traded as low as $US0.4820 from where, as the euro bounced against the US dollar, it rallied a little.

But not for long and 0.4820 soon reappeared.

Once the sellers neared 48 US cents option related orders were triggered and the Australian dollar dived through the figure.

"Now that we're in totally uncharted waters every 10 points is a new historic low and it is such a big story but often the move is not that big," Jo Masters noted.

"It does appear to have pulled up and we'll probably wait now for the Sydney market to come in."

She said the currency was likely to consolidate now, ahead of tomorrow's expected interest rate announcement from the Reserve Bank of Australia.

The RBA board meets today and is expected to agree on cutting interest rates by at least 25 basis points.

However, most market players are clamouring for 50 basis points as they believe that is what is needed to get economic growth going again.

AAP

http://www.smh.com.au/news/0104/03/update/news002.html

-- Martin Thompson (mthom1927@aol.com), April 03, 2001.


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