SYDNEY (Dow Jones)--The Australian dollar was slightly higher late Tuesday but markets remained cautious ahead of a vote in Greece this week on austerity measures needed to underpin an international debt bailout for the beleaguered country.
Any failure of the Greek parliament to support the proposed five-year US$40 billion in budget cuts could put the country on a path to bankruptcy and trigger flow-on effects for the euro area and global markets, dealers warned.
While optimism rose somewhat in markets Tuesday that the austerity measures would be accepted, Greece's socialist government was expected to face a knife-edge debate on the floor of parliament to force the issue.
"It is going to be a tight one," said Greg Gibbs, head of currency trading at RBS Australia.
"The market is presuming the Greeks will vote 'yes' because the alternative is chaos," he added.
The Australian dollar is often viewed as a barometer of global confidence and any failure of the vote could quickly lead to upheavals in European banks, which would transmit quickly to world markets.
At 0530 GMT, the Australian dollar was at US$1.0447, up from US$1.0414 late Thursday. Against the Japanese yen, the Australian dollar was at Y84.39, up from Y84.08.
As a measure of the Australian market's nervousness, debt markets have priced in a potential emergency cut in interest rates in January. OIS pricing puts a 76% chance of a rate cut by December and 100% by January.
Gibbs said it was an "insurance policy" against the worst-case scenario that could pan out in Europe, albeit it goes against recent hawkish comments by the Reserve Bank of Australia.
Earlier this month, RBA Governor Glenn Stevens said interest rates are likely to rise at some point. The RBA's policy-making board meets in a week, but is expected to leave interest rates unchanged. Economists say a hike in August is highly possible.
Annette Beacher, head of research at TD Securities in Singapore, said the chances of an interest cut by the end of the year are remote.
"The RBA has never adjusted monetary policy temporarily as the bank is primarily about targeting the medium-term outlook for inflation," she said. "The RBA will not be dictated to by OIS pricing."
--By James Glynn, Dow Jones Newswires; 61-2-8272-4685; james.glynn@dowjones.com
