Dollar weaker on Italy stalemate

THE Australian dollar is more than half a US cent lower as concerns about Italy's political stalemate continue to weigh on markets.

THE Australian dollar is more than half a US cent lower as concerns about Italy's political stalemate continue to weigh on markets.

At 12pm AEDT today, the currency was trading at 102.27 US cents, down from 102.83 US cents yesterday. It fell to 102.00 US cents early this morning, its lowest level since early October.

Westpac chief currency strategist Robert Rennie said markets were concerned about the results of Italian elections, which failed to produce a clear winner. Centre-left Democratic Party leader Pier Luigi Bersani scraped a razor-thin victory in the lower house of parliament but no party was able to win a majority in the senate.

"We've been very much dominated by offshore events," Mr Rennie said. "The suspense that now exists in Italy as we wait to see whether a coalition can be formed and, if so, how sustainable it is is something that continues to weigh."

Mr Rennie said that while developments in Italy and in the US, where automatic budget cuts are due to come into effect in March, unless Congress intervenes, would continue to weigh on the currency.

But he said that, with the currency now close to 102 US cents, it was likely to gain support from institutional investors.

"We haven't spent a great deal of time below that level in the past six or eight months so you would naturally expect to see some corporate demand and central bank demand for the Aussie," he said.

He said the key local driver for the currency over the next few days would be the release of official capital expenditure data for the December quarter tomorrow.

Meanwhile, Australian bond futures were stronger at noon. At 12pm AEDT today, the March 10-year bond futures contract was trading at 96.670 (implying a yield of 3.330 per cent) 96.645 up from (3.355 per cent), yesterday afternoon. The March three-year bond futures contract was at 97.280 (2.720 per cent), up from 97.260 (2.740 per cent) previously.