Dollar dives on forecast rate cut

THE dollar tanked sharply in late trade, dropping below 107 US cents, after a major local bank said it expected the central bank to cut interest rates by Christmas.

THE dollar tanked sharply in late trade, dropping below 107 US cents, after a major local bank said it expected the central bank to cut interest rates by Christmas.

Westpac today reversed its outlook for official interest rates, saying it now expects a series of rate cuts, starting with 25 basis points in December and continuing throughout 2012.

The bank had previously forecast a rate rise in December.

"We now expect a sequence of rate cuts beginning with 25 basis points in December 2011 and through 2012 totalling 100bps prior to a period of steady rates in 2013," Westpac said in a statement.

The Australian dollar fell from 107.41 US cents at 3.34pm AEST to 106.93 US cents by 4.15pm AEST.

"While the catalyst for the first rate cut is likely to come from offshore, we do not expect it to be a one off," Westpac said.

"Interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy and a downward adjustment is required to avert a damaging round of contraction.

"This rate adjustment is likely to take a similar form to previous easing cycles."