SYDNEY (Dow Jones)--The Australian dollar edged higher Monday as U.S. President Barack Obama confirmed a deal to raise the debt ceiling is in place, easing concerns of a possible credit downgrade or default.
Along with leading to a rallying currency, the news sent bond prices in Australia lower across the curve.
At 0550 GMT, the Australian dollar was at US$1.1050, up from US$1.0952 late Friday. Against the Japanese yen, the Australian dollar was at Y85.765, up from Y84.89.
Setting off the move, Obama said leaders of both political parties reached a broad deal Sunday to raise the government's debt ceiling while cutting spending. Earlier Sunday, congressional aides said the agreement would raise the debt ceiling by US$2.4 trillion in three stages and provide initially for roughly US$900 billion in spending cuts over 10 years.
The currency was further lifted by a report showing China's official Purchasing Managers Index fell to 50.7 in July from 50.9 in June, indicating that growth in manufacturing activity continued to slow as a result of Beijing's tightening measures. Economists said the data was a broadly positive sign, indicating that inflation pressures eased in July.
Even with the gains, Macquarie's foreign exchange research department said to expect more in the coming days, especially given the Reserve Bank of Australia meets Tuesday and is likely to signal increasing odds of a rate hike in coming months.
"The RBA interest rate decision Tuesday will, however, be one of the keys to (the Australian dollar's) performance, with several analysts now calling for a tightening after last week's stronger-than-expected (inflation) data. We expect the RBA to remain on hold, although to reaffirm its tightening bias," said Macquarie, which tipped resistance at US$1.1100--just above the currency's latest 30-year high of US$1.1080.
Even so, there was some concern in bond and foreign exchange markets about the prospect that even with the U.S. deal, a ratings agency downgrade could still be in the cards.
TD Securities Head of Asia-Pacific Research Annette Beacher said Monday's gains were a "knee-jerk" reaction and the U.S. agreement may not be enough to placate ratings agencies.
"We could still see 'outlook negative' and then this reverses completely. It's not what the market thinks; it's what the ratings agencies think," she said.
--By Geoffrey Rogow, Dow Jones Newswires; +61-2-8272-4686; geoffrey.rogow@dowjones.com
