SYDNEY (Dow Jones)--The Australian dollar fell to its lowest level in three weeks as a member of the European Central Bank called for a doubling of the region's bailout fund.
After trading mostly flat in Asian trade, the currency's run lower came after ECB Governing Council member Nout Wellink said the European Financial Stability Facility--the eurozone's temporary sovereign bailout fund--should be doubled to EUR1.5 trillion, according to an interview he gave to Dutch newspaper Het Financieele Dagblad.
Along with other risk-sensitive currencies, the Australian dollar quickly shot below US$1.0521 -- marking its lowest level since May 26 -- and leading some to worry further declines would be in the cards as European traders start work.
"As London comes on, I could easily see the Aussie lose another cent if it gets legs," said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia.
At 0645 GMT, the Australian dollar was trading at US$1.0535, down from US$1.0705 late Wednesday, though up from its intraday low of US$1.0507. Against the Japanese yen the Australian dollar was at 85.175, down from Y86.19.
While the currency sold off, Australian bonds surged on the back of the Greek worries, with the 30-day interbank futures market even pricing in the possibility of a rate cut from the Reserve Bank of Australia when it meets again in July. While it's still a low probability -- priced in at just a 4% chance -- the trade comes in stark contrast to comments from RBA Governor Glenn Stevens in a speech on Wednesday, when he signaled rates would need to go higher to combat inflation.
"The bond market is saying the RBA is just wrong. The view in the market is things just aren't as good as (the RBA) thinks and things are about to get a whole lot worse," said Matthew Johnson, an interest rate strategist at UBS.
Johnson said the depth of the move, with three-year bond futures rallying 17 ticks to 95.30, showed traders were clearly overly short going into the session and subsequently being squeezed out of position.
-By Geoffrey Rogow, Dow Jones Newswires; +61-2-8272-4686; geoffrey.rogow@dowjones.com
