Australian dollar drops after Fed rate warning

The Australian dollar retreated today after one of the strongest warnings yet from the Fed that it was ready to start raising rates.

The Australian dollar retreated today after one of the strongest warnings yet from the US Federal Reserve that it was ready to start raising interest rates in September.

The Australian dollar was trading at US73.49c at 5pm, down from US73.75c late yesterday.

Federal Reserve Bank of Atlanta president Dennis Lockhart said the world’s largest economy was ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.

“I think there is a high bar right now to not acting, speaking for myself,” Mr Lockhart said in an exclusive interview with The Wall Street Journal.

He is among the first officials to speak publicly since the Fed’s policy meeting last week, at which the central bank dropped new hints that a rate increase was coming closer into view, a point he sought to underscore.

Higher US interest rates are expected to support a higher US dollar against currencies such as the Australian dollar.

Still, earlier this week, the Reserve Bank of Australia changed its stance on the Australian dollar from one of warning that it needed to fall further, to a view that it was adjusting to lower commodity prices.

That less worrisome view saw the currency rally sharply yesterday. Traders expect the Australian dollar to remain supported for the near-term.

“While hindsight is 20:20, should we really be that surprised by the RBA’s latest stance?” said Stephen Innes, senior trader at currency house OANDA, adding that the central bank had been warning about the risk associated with lower rates, especially in the overheated housing market, for some time.

Employment data for July tomorrow is expected to show solid employment growth for the month, fanning speculation that the RBA might be done cutting interest rates.