Interpac Business and Migration Solutions Melbourne Australia

February 20, 2010

THE Australian dollar and euro rebounded today in the New York session as investors saw the Federal Reserve's surprising discount rate hike as a sign the economy was on the mend and snapped up riskier assets such as stocks and oil.

The rally in euro erased most of the decline in response to the Fed's move yesterday, when the common currency lost more than US1 cent on the initial interpretation that central banks in Europe and Japan would lag the US in lifting interest rates.

Australian dollar had fallen as low as US88.88 cents in yesterday’s domestic session, down sharply from trading around US90.25c shortly before the Fed announcement.

The Australian dollar settled the New York session today at US89.88c.

Hawkish comments by the Reserve Bank of Australia governor Glenn Stevens yesterday helped the Australian dollar rally in the European and New York sessions.

"We had people who got a little bit ahead of themselves as the (Fed hike in discount rate) doesn't mean the Fed is going to raise the fed funds rate, so (yesterday's) reaction was a little extreme," said Brian Kim, a currency strategist at UBS AG in Stamford, Conn.

The Fed's move to normalise its emergency lending terms was "good for risk," he added.

Adding to that view, US consumer prices excluding food and energy posted a monthly decline, the first since 1982, another sign that there's little pressure on the Fed to move quickly ahead with rate hikes.

Still, any gains by the euro would be limited by concerns about the fiscal health of the weaker nations in the eurozone, Mr Kim said.

"Any move upward for the euro" will be short-lived as long as the debt problems in Greece and other European countries affect investor sentiment, he said.

Highlighting investors' downbeat outlook, speculative bets against the common currency rose for a third week in a row. Such bets -- called shorts -- against the euro increased to about 59,000 contracts in the week ended Tuesday, according to an analysis by Scotia Bank of the weekly Commitments of Traders Report, or CTR, released by the Commodities Futures Trading Commission today.

The about $US10 billion ($11.1bn) in net bets against the euro show speculative investors still hold negative sentiment toward Europe's common currency, said Camilla Sutton, currency strategist at Scotia Bank in Toronto, though the pace of those bets was starting to slacken, she added.

Short positions showed "some stabilisation," Ms Sutton said, but "all in all, sentiment toward the euro is still very negative."

The data represent only small slice of the foreign exchange market and reflects positions taken by the most active speculators.

In late New York trading, the euro was at $US1.3613, up from $US1.3527 late in the previous New York session, according to EBS via CQG. The US dollar was at Y91.65, off from Y91.80, while the euro was at Y124.64, above Y124.25. The British pound was at $US1.5467, down from $US1.5575.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 80.611, down from 80.859.

As a result, Deutsche Bank's PowerShares US Dollar Index Bearish exchange-traded fund was down 0.34 per cent from the previous New York session, while its PowerShares U.S. Dollar Index Bullish was up 0.27 per cent. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE's Dollar Index.

"Global markets faced considerable challenges this week but have come out on the other side and are taking risk in stride," said Lena Komileva, head of G7 Market Economics at Tullett Prebon in London.

Investors took the Fed's discount rate increase as a signal the US economy is improving at a faster rate than its rivals, bringing forward expectations key US interest rates could increase sooner than expected, even as Fed officials stressed the move wasn't a sign of broader monetary tightening.

The hike represents "another step along the path of monetary policy normalisation, which will eventually end in policy interest rate increases," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "We continue to see the US dollar outperforming the euro, the pound and the yen -- currencies of countries where the economic recovery appears to be lagging."

In contrast with a US economy dragging itself from the depths of the financial crisis, Britain registered a steep and unexpected drop in retail sales, sending the pound to a nine-month low in European trading before sterling recovered slightly in New York trading.

The UK retail sales index, including fuel sales, fell 1.8 per cent on the month and rose 0.9 per cent on the year in January. That was the sharpest monthly drop since February 2009. Economists surveyed by Dow Jones Newswires last week were expecting a 0.5 per cent monthly decline and a 1.1 per cent annual gain.

(Source from The Economist.com)