THE Australian dollar was sharply lower late today after the Reserve Bank of Australia cut interest rates for the first time in more than two years, fine-tuning policy settings as inflation risks fade.
The RBA cut its benchmark interest rate to 4.5 per cent from 4.75 per cent, a move that was in line with market expectations and brought to an end a year of steady policy.
At 4.45pm (AEDT), the Australian dollar was trading at $US1.0448 from $US1.0532 late yesterday. Against the yen, the currency changed hands at Y81.57 from Y83.411.
Most economists don't expect the RBA to cut at its December policy meeting, but many warned that if conditions in Europe soured or unemployment rose locally, it may see the need for another cut. A survey of 21 economists by Dow Jones Newswires conducted late today showed all expect the RBA to hold interest rates at 4.5 per cent in December.
"We think it would take a considerable deterioration in global sentiment and data to push the RBA again in December," said Su-Lin Ong, chief economist at RBC Capital Markets.
"With cash a little closer to neutral, the RBA is likely to be happy to sit it out until the new year and reassess after another inflation report at the end of January," she added.
David Scutt, senior currency trader at Arab Bank, said the market focus is now back on Europe and efforts to support Greece and the region's banks.
A test of key support at $US1.0400 could come in Europe as the markets look for more reassurance that the deal bolted together by European leaders last week will stand up.
"It looks bearish, and if Italian bonds come under further pressure, the Aussie won't be far behind," Mr Scutt said. "It's clear that until we get concrete plans for the EFSF, risk will be off the table," he added.
Concerns also spread through markets on news Greece will hold a referendum on the proposed debt bailout in January. Traders said the risk it will be rejected is likely to eat into market confidence over coming months.
News that China's October purchasing managers index fell to 50.4 from September's 51.2 also dented confidence. China is Australia's largest trading partner, buying much of its chief exports of coal and iron ore.
