Dollar gets a boost from rates decision

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Dollar gets a boost from rates decision

The Australian dollar rose on Tuesday after the Reserve Bank seemed more upbeat on the economy than some had speculated at its policy meeting, where it left rates unchanged as expected at 4.5 per cent.

At the local close, the currency was trading at 84.53 US cents, little changed from yesterday’s close, but nearly a cent higher than the day’s low.

Bill futures fell, as cautiously optimistic remarks from the Reserve Bank of Australia (RBA) led investors to pare the remote chance of a rate cut this year.

"It was slightly more positive than may have been expected," said Su-Lin Ong, an economist at RBC Capital. "The RBA appears to have not downgraded their global growth forecasts, although their assessment of Europe continues to be tinged with considerable uncertainty."

For now, the Aussie dollar faced resistance at $US0.8510 to $US0.8520, the 38.2 per cent retracement of its drop from $US0.8859 to $US0.8314 on the hourly chart.

Investor concerns that falling global stock markets heralded another recession in the world economy had led some investors to price for a chance the RBA may cut rates this year.

Those bets were pared somewhat on Tuesday. One-year interest rate swaps edged up to 4.7875 per cent.

Three-year government bond yields nudged higher to 4.44 per cent, albeit still under the RBA's target cash rate of 4.5 per cent.

The cash yield curve flattened slightly to 62.2 basis points, its flattest in over a week.

The interbank futures market seemed more sceptical on the outlook. The December contract was still priced for around a 40 per cent chance of a 25-basis-point rate cut by December.

But many analysts argued this was overblown.

"We still see a greater risk that rates will go up than down," said Katie Dean, an analyst at ANZ.

Dean argued uncertainty over the health of the world economy may lead the RBA to tolerate more price pressures before lifting rates, but stressed that meant the RBA would leave rates steady at 4.5 per cent for the year, rather than loosen policy.

Reuters

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