Australian Dollar Hits Lowest in Over Five Years After RBA Rate Cut

 
   By Anjani Trivedi 
 

        The Australian dollar tanked to fresh five-and-a-half-year-lows Tuesday, becoming the latest major currency to join the race to the bottom in the foreign exchange market after the central bank cut its key interest rate.
        Australia's currency fell as much as 1.9% against the U.S. dollar, making it one of the worst-performing major currencies in the last three months and bringing its losses this year in line with other currencies which have been weakened by policy easings by their central banks.
        The Reserve Bank of Australia joins the Monetary Authority of Singapore, Reserve Bank of New Zealand, European Central Bank, Bank of Canada and the central banks of India, Denmark and Switzerland in either announcing substantial policy shifts or easing monetary settings-in some cases dramatically-since January 1.
        Investors say they were surprised by how sharply the Australian dollar - or the Aussie -- fell, despite widespread chatter about the potential for a rate cut ahead of the policy announcement.
        Shane Oliver, head of investment strategy at AMP Capital in Australia, said his funds are betting against the Aussie, but the size of its fall was surprising. Calling the drop a "race to the bottom," Mr. Oliver said "the Reserve Bank realized if it didn't do something, it would get trampled in the process," as central banks around the world eased their monetary policies.
        The RBA on Tuesday cut its benchmark interest rate to a fresh record low of 2.25%, after indicating at the end of 2014 that it would keep its interest rate stable.
        Analysts and investors said that the central bank's statement signaled that it wants to see an even weaker Australian dollar and will cut rates further if the Aussie doesn't drop. While the RBA in its monetary policy statement noted that the Australian dollar had "declined noticeably against a rising U.S. dollar," it said that the Aussie still remains overvalued and "a lower exchange rate is likely to be needed to achieve balanced growth in the economy."
        Bond yields, which move inversely to prices, on benchmark government bonds plunged to record lows as global investors searching for yield piled into Australian bonds, where yields are relatively higher. Elsewhere in the developed world, yields on bonds are either in negative territory or close to it.
        In a report last week, market strategists from J.P. Morgan noted that a total of $3.6 trillion of global government bonds were traded with a negative yield, last week signaling a growing number of investors fearing widespread deflation.
        The closely-linked New Zealand dollar also took a beating, and fell as much as 1.3% against the U.S. dollar after the rate cut. It last traded at US$0.7213 against the U.S. dollar. The Australian dollar last traded at US$0.7655, after dropping as low as US$0.7648. It traded around US$0.7780 before the RBA decision.
        -Write to Anjani Trivedi at anjani.trivedi@wsj.com
        (END) Dow Jones Newswires

        February 03, 2015 01:19 ET (06:19 GMT)

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