Aussie dollar rallies despite bigger-than-expected rate cut
SAN FRANCISCO (MarketWatch) -- The dollar fell sharply against the euro and most other major currencies but gained on the yen Tuesday, as Americans headed to the polls and equity markets surged on a further bounce in risk appetite.
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, was at 84.533, down from 86.350 late Monday.
The euro surged more than 3% to $1.3002, up from $1.2641 in North American trading late Monday. Earlier Tuesday, it rose as high as $1.3047.
"Today might be the day that marks the beginning of a legitimate U.S. dollar correction," wrote Jack Crooks, president of Black Swan Capital, an independent currency advisory and trading firm.
"[W]e've been open to this potential for the last several weeks, as we think a lasting correction is due before the U.S. dollar can start on its next powerful leg of what we are expecting could be a multi-year bull market," Crooks said in emailed comments.
All eyes Tuesday were on the U.S. presidential election, which has pitted Sen. Barack Obama of Illinois, the Democratic presidential nominee, against his Republican challenger, Sen. John McCain of Arizona. Pre-election polls showed Obama holding a strong lead over McCain. Read more.
But strategists said the final outcome of the election wasn't likely to be a major driver for currency markets.
"Implied volatility has continued to fall, suggesting the euro could move higher in coming days with market participants likely to look past today's U.S. presidential elections toward what could be horrendous jobs numbers on Friday," wrote currency strategists at Brown Brothers Harriman.
The sharp dollar weakness came as commodities such as oil, gold and copper rallied. The Reuters/Jefferies CRB Index , a benchmark gauging the prices of major commodities, soared. See Futures Movers.
Any move in the dollar typically fuels an opposite move in dollar-denominated commodities, because a weaker dollar makes them cheaper for holders of other currencies.
On Wall Street, U.S. stocks rallied, with the Dow Jones Industrial Average ending up more than 300 points. See Market Snapshot.
The CBOE Volatility Index fell 9.8% to 48.74, its lowest since early October. A further retreat in London interbank offered rates (Libor) and reports the U.S. could extend its bailout to other financial institution renewed appetite for riskier assets, including stocks and higher-yielding currencies.
Three-month Libor denominated in U.S. dollars fell to 2.706% from 2.859% Monday, to its lowest level since June 9. One-month Libor fell to 2.177% from 2.358% Monday, to its lowest level since Nov. 2004.
The euro and the British pound surged despite expectations that the European Central Bank and the Bank of England will cut interest rates on Thursday.
The British pound was up $1.5976, after hitting an intraday high of $1.6105. It was at $1.5835 late Monday.
The dollar did gain against the yen, the most sensitive currency to risk aversion in recent months. The greenback rose to 99.62 yen, after earlier rising as high as 100.54 yen. It bought 99.04 yen late Monday.
Aussie rallies
The Australian dollar and New Zealand dollar were the biggest gainers Tuesday, even after the Reserve Bank of Australia cut its cash rate by 0.75 percentage point.
The RBA cut to 5.25%, exceeding expectations for a half-point cut. See full story.
The yen gained immediately after the move, boosted by expectations that other central banks will also cut sharply and reduce the attractiveness of carry trades, said Alastair Chan, a Sydney-based economist with Moody's Economy.com.
The Australian dollar was up 3.3% against the U.S. dollar in recent trading at 69.84 U.S. cents. The Aussie also turned higher against the Japanese unit, rising 4% to 69.63 yen.
"Typically, when central banks cut interest rates that currency depreciates, but investors' willingness to take more risk seems to be the overriding theme this week," James Hyland, a strategist at Wachovia, said in a research note.
Attention is likely to turn back to the "synchronized" global-growth slowdown in coming weeks, which will likely underpin currencies from countries with current-account surpluses, such as the Japanese yen and the Swiss franc, according to said Marcus Hettinger, currency strategist at Credit Suisse in Zurich.
The rise in risk appetite boosted emerging-markets currencies, with the Turkish lira soaring 4% against the dollar and the South African rand gaining 3.5%.
