SYDNEY (Dow Jones)--The Australian dollar fell to its lowest levels in more that two months Monday as investors withdrew from the market ahead of a pivotal vote by the Greek government on austerity measures this week.
Acceptance of the harsh tonic for Greece is needed to secure a bailout by the European Union and the International Monetary Fund that will prevent a default on a mountain of accrued debt.
Greek Prime Minister George Papandreou faces a make-or-break week in which he will seek to steer a US$40 billion austerity bill through Parliament in the face of widespread protests. Voting will take place Wednesday and Thursday.
Failure could leave Greece headed for bankruptcy and fuel upheaval among the euro currency area.
"With heightened levels of fear in the market, traders are taking a sell first, ask questions later approach. It will be a matter of if and when the Greek austerity package is approved when buyers are likely to return," said Ben Potter, strategist at IG Markets.
At 0600 GMT, the Australian dollar was at US$1.0414, down from US$1.0541 late Thursday. Against the Japanese yen, the Australian dollar was at Y84.08, down from Y84.79.
The slide in the Australian dollar was also helped by the fact that financial markets have begun to price in some chance of an interest rate cut at a Reserve Bank of Australia policy meeting next week.
According to Credit Suisse, there is a 12% chance of a cut next week, lowering the cash rate target from 4.75% to 4.50% and marking the first easing in policy since the global financial crisis.
Still, few economists believe there is any risk of a cut, short of a complete collapse in confidence globally over Greece. Some analysts have said a Greek collapse would be a "Lehman-style event".
For now, RBA officials are sounding hawkish, with deputy RBA Assistant Governor Phil Lowe on Friday highlighting the risks surrounding inflation and reminding markets the central bank's goal of low and steady inflation remains its core policy objective.
Second quarter inflation data at the end of July will further shape interest rate expectations. Until then, the RBA looks sidelined.
There are some hawks in the market. Joe Capurso, currency strategist at Commonwealth Bank, retains a forecast for the Australian dollar to touch US$1.1200 by September. High interest rates, a weak U.S. dollar and strong commodity prices will help the Australian dollar to rebound, he said.
John Kyriakopoulos, head of currency strategy at National Australia Bank, said the Aussie could snap back up as far as 1.0800 in the near-term.
--By James Glynn, Dow Jones Newswires; 61-2-8272-4685; james.glynn@dowjones.com
