LONDON - The Australian dollar hit its highest against the dollar since 1983 on Tuesday after a surprise Australian interest rate hike, while the U.S. currency stayed weak on expectations of fresh monetary easing. The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.75% as a pre-emptive strike against inflation, sending the Aussie above parity to US$1.0013, its highest since the currency was floated in 1983. The RBA's move increased the interest rate differential between Australia, where rates are rising, and the United States, where the Federal Reserve is widely seen as easing policy further on Wednesday to help stimulate the economy. Analysts said this view would support the Australian currency while providing one more reason to dump the dollar, which already has suffered on speculation that more Fed easing will further weaken the currency. "We're entering uncharted territory, but the Aussie has staying power up here," said Carl Hammer, chief currency strategist at SEB in Stockholm. "We see it trade above parity in the mid term, as there's also the issue of general dollar selling." Investors also anticipated results of U.S. midterm elections, with analysts saying the dollar may initially gain slightly on relief after clearing a hurdle in a week piled high with event risk. By 0855 GMT, the Australian dollar traded 1.4 percent higher on the day at US$1.0001. Near-term gains were seen limited by stop-loss orders seen around US$1.0015. The euro rose 0.4% to the day's high of US$1.3966, with talk of demand of a semi-official European name helping boost the single European currency. The U.S. currency fell roughly half a percent to 76.957 versus a currency basket. The euro crept closer to US$1.40, a level which has provided key resistance in past weeks. While the market remains extremely short of dollars, participants believe those positions have been pared back in the lead-up to the midterm elections, whose results start to come in later on Tuesday, and the Fed's policy decision the next day. Markets are generally priced for the Fed to commit to buying at least US$500-billion in Treasury debt over the coming months. Much uncertainty surrounds the scope and pace of bond purchases, however, leaving the dollar vulnerable to choppy moves in prevailing ranges. "If the Fed's purchase is smaller than US$500-billion, there will be more dollar buying in the near term, though I suspect the dollar will remain under pressure on expectations that the Fed will eventually expand its asset purchases," a trader at a U.S. bank said. With the euro's triangle holding pattern since mid-October firmly in place, the lower end of the triangle around US$1.3750-70 is seen as a support and a good entry point for those betting on a break above the triangle after the Fed meeting. The dollar edged up 0.1% to 80.56 yen, though still in sight of the record low of 79.75 yen set in 1995. The risk of Japanese intervention to weaken the yen expected to mount if the dollar slips below 80 yen.

Source