Dollar drops as Libya forces risk rethink

THE dollar has fallen almost a full US cent amid ongoing fears about the political crisis in oil-rich Libya that undermined risk appetite.

THE dollar has fallen almost a full US cent amid ongoing fears about the political crisis in oil-rich Libya that undermined risk appetite.

At 5pm AEDT, the local unit was trading at 100.27 US cents, down from Monday's close of 101.25 cents. Since 7am AEDT, the Australian dollar traded between 100.95 cents and 100.10 cents.

Rochford Capital senior foreign exchange consultant Derek Mumford has said the Australian dollar has been under pressure since protesters overran several Libyan cities yesterday, putting President Muammar Gaddafi's 41-year regime under threat.

Since former Egyptian president Hosni Mubarak resigned on February 11, anti-government movements have spread through the Middle East to Libya, Tunisia and Bahrain.

"This is a much bigger deal than the Egypt crisis because Libya is a much bigger oil producer," Mr Mumford said.

"It's undermining risk appetite, expect US equities to have a big sell off when they get back online tonight (AEDT)."

US markets were closed yesterday for the Presidents Day public holiday.

Mr Mumford has said he expects the local unit to dip below parity with the US dollar over the next few days, although he doubts the decline will be sustained.

"If things resolve themselves in a reasonable amount of time, the Aussie will get a reasonable footing and be back above 101 US cents."

Mr Mumford has said the devastating earthquake that struck Christchurch had little effect on the local unit.

At 5pm AEDT, the Australian dollar was at 83.32 Japanese yen, down from Monday's close of 84.20 yen and at 73.79 euro cents, down from its previous close of 74.05.

The euro finished at 1.3591 US dollars, down from 1.3674 US dollars, and at 113.24 yen, down from 113.71.  The US dollar was at 83.32 Japanese yen, down from 83.16 yen on Monday.

Meanwhile the Australian bond market closed firmer.  At 4.30pm AEDT on the ASX 24, the March 10-year bond futures contract price was 94.400 (implying a yield of 5.600 per cent), marginally higher from Monday's close of 94.350 (5.650 per cent).

The March three-year bond futures contract price was at 94.850 (5.150 per cent), up from its previous close of 94.780 (5.320 per cent).

Deutsche Bank bond dealer Andrew Bryan has said the local bond market has been focused on ongoing tensions in the Middle East.  "The Middle East has been a little bit of a hotbed over the past month or so,'' Mr Bryan said. 

"And the focus is on Libya at the moment.  It's obviously a strategic part of the world, when you're talking oil prices."

Brent prices broke past $US107 in Asian trade, surpassing two-year highs as violence in Libya and Bahrain threatened to destabilise the key oil-producing Middle East and North African region.

Mr Bryan said supply levels were healthy in the local bond market following a successful $200 million auction of Treasury indexed bonds.

The 90-day bank bill closed at 4.910 per cent, marginally lower from 4.911 on Monday, while the 180-day bank bill rate was at 5.070 per cent, slightly higher from its previous close of 5.060.

The RBA's trade weighted index (TWI) was at 75.0, down from Monday's close of 75.3.