Dollar up on speculation of US stimulus

THE dollar is almost a full US cent higher as markets priced in the possibility that the US could embark on a new economic stimulus.

THE Australian dollar is almost a full US cent higher as global markets priced in the possibility that the US central bank could embark on a new round of economic stimulus.

At 5pm AEST today the Australian dollar was trading at 104.5 US cents, up from 103.64 cents on Friday. Since 7am AEST today, the currency has traded between 104.39 US cents and 104.69 cents.

Easy Forex senior dealer Francisco Solar said the Australian dollar had been supported by speculation the US Federal Reserve may be considering a third round of quantitative easing (QE3).

This would be through the buying of government bonds from banks to inject liquidity back into the American banking system.

US Fed chairman Ben Bernanke indicated at a press conference last week that the prospect of further quantitative easing was still an option if the US economy needed further stimulus.

"The Aussie is holding up quite well, merely because it looks like the market had underestimated the power of Bernanke and his talk of QE3 still being a possibility," Mr Solar said today.

"That (expectation) has kept the US dollar on the back foot and kept risk currencies like the Aussie dollar quite well bid."

Mr Solar said an expected interest rate cut from the Reserve Bank of Australia tomorrow was unlikely to lead to a sharp fall in the local currency.

He said the market had largely priced in a 25 basis point cut to the cash rate, which was currently at 4.25 per cent.

"There will probably be a knee-jerk reaction on the back of it, but the market is pretty content that it will cut by 25 basis points."