By Chris Zappone
The Australian dollar lost 1.5 US cents in value this afternoon over fears the US stimulus that had aided its recent rise will be smaller than expected and after benign inflation data reduced the chances of an interest rate rise.
The Aussie dropped as low as 97.19 US cents after a report published in the Wall Street Journal suggested the US Federal Reserve’s stimulus program could be more modest than expected.
At the local close, the dollar had recovered to 97.44 US cents but was still sharply lower than yesterday’s close of 99.19 US cents.
The Fed's asset-purchase program, known as quantitative easing, or QE, is expected to be launched next month. Market bets on a $US2 trillion program had weakened the greenback over the past two months, pushing the Aussie to touch parity with its US namesake on the weekend of October 16.
However, the report in the US media suggested the program will be "worth a few hundred billion dollars over several months".
Rochford Capital director Derek Mumford currency specialist said the combination of lower expectations for Australian domestic interest rate increases after benign CPI data and rumours of a much smaller QE stimulus from the US Fed had triggered a sell-off which could see the dollar drop even further.
“QE limited to $US300 billion compared to Goldman Sachs estimates of an eventual $US2 trillion published earlier in the week will undermine US equity confidence and reverse the 8-week bull run, which could see the AUD down to 96.25 US cents overnight,” he said.
“The correction could go deeper thereafter to 94.25 US cents before another run at parity develops,” he said.
The impact of the WSJ report came after the Aussie dollar had already sunk on weaker-than-expected quarterly inflation data, which cut expectations for an interest rate rise when the Reserve Bank board meets next week.
The dollar had traded as high as 98.69 US cent before the release of the inflation data.
The CPI rose 0.7 per cent in the September quarter, coming in slightly lower than expected, according to the Australian Bureau of Statistics.
The probability of an interest rate rise when the RBA meets next Tuesday slumped to a one-in-six chance after the release of the inflation figures from a 50-50 prospect earlier in the day.
czappone@fairfax.com.au
Business Day, with AAP