The Australian dollar shuffled sideways on Tuesday after a short-covering bounce overnight recouped some of its recent hefty losses, although sentiment towards risk assets remained very delicate.
The Aussie hovered at $US1.0350 in late trade, having bounced from a $US1.0256 trough overnight but lacked momentum to break through the 200-day moving average around $US1.0383.
"The whole move today seems to be lacking conviction," said David Scutt, trader at Arab Bank Australia.
Australian debt did well as 10-year bond futures touched a 2.5-year high to imply an yield of 4.12 per cent, well below the cash rate of 4.75 per cent.
Australian debt is considered relatively safe given the government's strong fiscal position and has been attracting heavy demand from foreign investors, who own over 70 per cent of all the debt on issue.
Late profit-taking nudged the three-year futures contract off 0.03 points to 96.430, while the 10-year was flat at 95.885.
The Australian dollar bounced from a one-month trough overnight on a report that China was asked to buy large chunks of Italian debt. Dealers, however, noted China had offered support for Greek bonds in the past and that changed little.
"You'd have to be very brave to back risk assets based off the possibility of the Chinese buying Italian bonds," said Scutt.
Indeed, Aussie sentiment remained vulnerable to events well beyond its control in Europe.
"There seems to be no real mechanism to stop the negative spiral," said Rob Ryan, currency strategist at BNP Paribas in Singapore.
Mounting fears of a Greek default, a surge in Italian bond yields and talk of a rating downgrade of French banks due to their sovereign exposure all weighed on risk appetite.
The Australian dollar has lost nearly 3 per cent in the past three sessions and traders said a fall below parity is a possibility. The Aussie broke above parity in March and only dipped under it for a few hours in August, when it bottomed at 99.27 US cents.
