Dollar surges as risk appetite makes return

THE dollar rose two US cents as traders showed a renewed willingness to invest in riskier currencies.

THE dollar rose two US cents as traders showed a renewed willingness to invest in riskier currencies.

TD Securities senior strategist Annette Beacher said the positive mood was sparked overnight on the back of better than expected housing data in the US.

She said traders were hopeful that a European Central Bank (ECB) three-year loan tender, due overnight, would attract a healthy amount of takers.

"There's an expectation that we'll get a good number there, which helps with liquidity heading into the new year," Ms Beacher said.

"There seems to be unbridled optimism in the market and the risk of disappointment is massive."

At 5pm (AEDT) yesterday, the dollar was trading at 101.45 US cents, up from 99.41 US cents yesterday.

At 4.20pm (AEDT), the euro fell to $1.2915 - its lowest level since its inception in 1999.

"The risk-on mood is favouring the Australian dollar," Ms Beacher said.

"The euro is actually rallying as well. It's just underperforming the Aussie."

The RBA's trade weighted index was at 75.5 today, up from 74.3 yesterday.

At 5pm (AEDT), the dollar was at 78.87 Japanese yen, up from yesterday's close at 77.52 yen, and 77.38 euro cents, up from 76.41 euro cents.

Meanwhile, domestic bond futures were weaker on today.

Yesterday (European time), Germany's Ifo economic institute revealed better than expected business sentiment and consumer confidence, while Spain auctioned off 5.64 billion euros ($7.44 billion) worth of government bonds.

ANZ head of interest rates research Tony Morriss said the market retreated from yesterday's highs.

"Bond markets were much weaker overnight and have remained so today because we had this better economic data from offshore," he said.

"And also a strong stock market performance, which has flowed onto our markets with almost two per cent gains."

Mr Morriss said bond prices could continue to decline as the market looked to the ECB's loan tender overnight.

"I think there's a feeling that we're going into very important news tonight, with this liquidity operation by the ECB, which will provide very cheap long-term funding to European banks," he said.

"US treasury and Bunds have sold off, but the distressed periphery - Spain and Italy in particular - saw their bonds rally really sharply in anticipation of strong demand as a result of these liquidity operations.

"That's improved risk appetite in the market."

While warning that this was not a concise solution to the eurozone debt crisis, Mr Morriss said the added liquidity was well overdue.

At 4.30pm (AEDT) today, the March 10-year bond futures contract was trading at 96.165 (implying a yield of 3.835 per cent), down from 96.230 (3.770 per cent) on Today.

The contract reached 96.265 early yesterday, a record high for Australian 10-year futures.
The three-year bond futures contract was at 96.940 (3.060 per cent), down from 97.040 (2.960 per cent) on yesterday.