Australian dollar weakens after unexpected trade deficit
By William L. Watts and Lisa Twaronite, MarketWatch
LONDON (MarketWatch) — The U.S. dollar gained ground on most major rivals Tuesday, as China delivered an unexpected rate hike.
China’s central bank lifted its base lending and deposit rates by a quarter-point, according to news reports, bringing the one-year deposit rate to 3.25% and the one-year lending rate to 6.31%.
“The rate hikes were not expected with China on holiday, but the impact on the markets appears to be diminishing, with the realization that further hikes will be needed ahead with elevated” inflation numbers coming out of China, said Chris Walker, strategist at UBS.
The dollar index (DXY 76.09, +0.18, +0.23%) , a measure of the U.S. currency against a basket of six major rivals, rose to 76.102 from 75.912 in North American trade late Monday.
After China’s rate hike, U.S. stock-index futures slightly extended losses. Weaker equities tend to lift the dollar on safe-haven flows, although the relationship has weakened in recent months.
Against the dollar, the euro (EURUSD 1.4165, -0.0054, -0.3798%) slipped to $1.4167 from $1.4219 on Monday.
The euro weakened slightly after ratings agency Moody’s Investors Service delivered another cut to Portugal’s sovereign-debt rating. Moody’s lowered Portugal to Baa1 from A3, following recent cuts by Fitch and Standard & Poor’s. Read about Moody's downgrade of Portugal.
The move underlined expectations that Portugal will soon be forced to seek a bailout from the European Union and International Monetary Fund due to soaring borrowing costs.
Strategists at Commerzbank in Frankfurt said the focus for the euro/dollar pair is now firmly on Thursday’s European Central Bank meeting, which is expected to produce a quarter-point hike in the key lending rate to 1.25%.
“Even though a rate hike is a fait accompli, the question remains how hawkish ECB President Jean-Claude Trichet will sound at the press conference,” they said, in a research note.
The dollar (USDYEN 84.5700, +0.4300, +0.5111%) rose to ¥84.35 from ¥84.07 late Monday. The euro (EURYEN 119.7800, +0.2000, +0.1672%) rose to ¥119.51 from ¥119.31. See real-time currency rates and tools.
The U.S. dollar gained on its Australian counterpart after that country posted an unexpected trade deficit.
Australia’s exports fell and imports rose in February, sending the nation’s trade account to a surprise deficit of 205 million Australian dollars ($212 million), according to data Tuesday from the Australian Bureau of Statistics. Economists had called for a trade surplus of A$1.2 billion, according to a survey reported by Dow Jones Newswires. Read more on Australian trade deficit.
The unexpected trade deficit pressured the Australian dollar (AUDUSD 1.0307, -0.0064, -0.6171%) , which traded as low as $1.0286 versus the U.S. unit in the wake of China’s rate hike. It recently traded at $1.0303, down from $1.0354 in late North American trading on Monday.
As expected, the Reserve Bank of Australia left its key lending rate unchanged at 4.75% at its meeting Tuesday.
“Hopes for a slightly more hawkish statement turned out to be incorrect, though,” analysts at Commerzbank said. “The RBA once again referred to the strong Australian dollar as a dampener for inflation.” Read about the RBA's rate decision.
Further lifting the greenback, Federal Reserve Chairman Ben Bernanke said Monday evening that commodity prices are being driven primarily by global supply and demand and don’t threaten a major acceleration of inflation.
As long as inflation expectations remain stable and well anchored, “which in my view remains the case,” and as long as commodity-price increases eventually stabilize, then this will not be reflected in a standard increase in inflation, Bernanke said. Read more about Bernanke’s remarks.
“The chairman’s comments put a modest bid into the USD, especially against commodity currencies and the JPY [Japanese yen],” said currency strategists at Barclays Capital.
“We continue to think the uncertainty surrounding U.S. monetary policy makes the USD a less desirable funding currency for carry trades, especially versus the JPY,” they said. Read more on yen carry trade.
The British pound (GBP 161.32, +0.21, +0.13%) jumped to $1.6234 from $1.6128 Monday, after the purchasing managers index for the services sector unexpectedly rose to a 13-month high. Read about the rise in services activity.
The data are unlikely to convince the Bank of England’s Monetary Policy Committee to hike its key lending rate when it concludes its monthly policy meeting Thursday, but it “is a strongly positive sign for the U.K. services sector and increases the likelihood of a rate hike in May,” Walker of UBS said.
