The Australian dollar fell heavily today after a downward adjustment to inflation added to the case against higher rates in Australia, while growing fears of a banking crisis in Europe weighed on risk appetite.
The Aussie sank 1.2 per cent to a one month-low of $US1.0179, from $US1.0318 in New York, with selling from macro funds seen on the break of $US1.0250 support.
The retreat began following a restatement of Australia's underlying inflation to show smaller increases in the first quarter than first reported.
Under the new seasonal methods, average underlying inflation rose just 0.6 per cent in Q2, much lower than the initial 0.9 per cent increase.
"The bottom line is CPI pressures are not as big as we thought," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia.
That should be a relief to the Reserve Bank of Australia (RBA) which has been concerned by the jump in inflation, and lessen the need for a rise in interest rates anytime soon.
The revision encouraged the market in its bet that the RBA will eventually have to cut rates, given the darker global outlook. December interbank futures gained 0.12 points to imply a rate of 3.73 per cent, a long way from the current cash rate of 4.75 per cent.
Australian bond futures also gained, with the three-year contract up 0.075 points at a one-month high of 96.510 and the 10-year scaling a fresh 2.5-year peak of 95.925.
Risk sentiment turned sour globally as Asian stocks fell deeper into the red with heavy real money funds closing positions in Asian currencies.
"It's the first time we see this level of real money repatriating funds from Asia," said a trader.
Comments by China central bank adviser Li Daokui that Beijing should refrain from buying large amount of European bonds and the much-expected ratings downgrade of French banks added to the already negative sentiment.
CBA's Capurso said he expected the Aussie to fall to parity by the end of the week. The local currency broke above parity in March and only dipped under it for a few hours in August, when it bottomed at $US0.9927.
"The weakening of the global economic outlook is negative for commodity currencies," he said.
Immediate support is found at $US1.0110, the August 11 low, then $US1.0065 and $US1.0025.
Greek, German and French leaders will hold a conference call overnight, with markets hoping for progress on at least the next tranche of aid for Greece, which would put off a default, for now.
But the outcome is unlikely to bring a resolution to the ongoing debt crisis, leaving the euro and risk assets vulnerable to sharp moves lower.
