Dollar lower as US debt limit deadline nears

THE Australian dollar was weaker at noon, as traders waited to see whether US politicians will be able to agree on a plan to raise the country's borrowing limit and avoid a catastrophic default.

THE Australian dollar was weaker at noon, as traders waited to see whether US politicians will be able to agree on a plan to raise the country's borrowing limit and avoid a catastrophic default.

At 12pm AEST today, it was trading at 109.83 US cents, down from 110.40 US cents yesterday afternoon.

It hit a peak of 110.81 US cents on Wednesday night, its highest level since the fixed exchange rate era ended with its float in December 1983.

Nomura head of foreign exchange Kurt Magnus said the Australian dollar would most likely climb higher over the weekend, due mainly to a weakening US currency.

With only four days to go before an August 2 deadline when the US Treasury says it will no longer be able to borrow funds to pay its bills, investors remain nervous that a fragile economic recovery after the 2008 global financial crisis may be at risk.

Traders were hopeful the ongoing impasse between the Democrats and Republicans will be resolved over the weekend, allowing the country's debt-ceiling to be raised.

"I'm bullish about the progress being made this weekend. I think something will be done," Mr Magnus said.

He said it was interesting to note the Australian dollar had continued to surge this week, despite losses on the local share market.

"What we've seen is a definite breakdown in correlation between equity market weakness and Aussie dollar weakness.

"That to me is a clear sign that with the US (crisis), it's all about the US dollar at the moment."

Next week the focus may shift to domestic news, with the Reserve Bank of Australia (RBA) meeting on Tuesday for its monthly board meeting and decision on the cash rate.

Mr Magnus expects the central bank to raise the cash rate by 25 basis points to five per cent on Tuesday.

"The RBA is going to have to hike - whether it's next week or next month, in September," he said.

"It might be a hike next week and nothing for the rest of the year."

Meanwhile, the Australian bond market was firmer.

At 12pm AEST, the September 10-year bond futures contract was trading at 95.180 (implying a yield of 4.820 per cent), up from 95.090 (4.910 per cent) yesterday.

The September three-year bond futures contract was at 95.550 (4.450 per cent), up from 95.480 (4.520 per cent).