Australian dollar falls in wake of US Fed talk

The Aussie dollar’s recent downtrend looks set to continue amid speculation about US interest rate hikes.

Federal Reserve Chair Janet Yellen, right, talks with vie chairman Stanley Fischer. Pic: AP

The Australian dollar’s recent downtrend looks set to continue this week amid speculation of US interest rate hikes following the Jackson Hole central bankers’ meeting.

The local currency struck a fresh four-week low of US75.25 cents in early Sydney trading after peaking at US76.92c on Friday night. At 10.42am (AEST) the dollar was trading at US75.34c.

After hitting a three-month high of US77.56c in early August as low interest rates globally fuelled demand for Australian bonds and equities, the Aussie dollar has fallen as much as 3 per cent as comments from Federal Reserve officials and US economic data indicate the world’s most powerful central bank could lift interest rates as soon as next month.

In her speech to central bankers at Jackson Hole in Wyoming on Friday, Federal Reserve chair Janet Yellen said: “The case for an increase in the federal funds rate has strengthened in recent months.”

Vice chairman Stanley Fischer subsequently said that Ms Yellen’s message was consistent with a rate hike in September and the potential for two hikes before year end.

“The inclusion of the word strengthened was new to the Fed’s policy outlook and indicated a hawkish shift, but markets didn’t really believe it until vice chairman Fischer spoke to CNBC,” said Westpac markets strategist Imre Speizer.

The market-implied probability of a September interest rate hike by the Fed rose from 33 to 42 per cent on Friday and the chance of a hike by December rose from 68 to 76 per cent.

Adding to upward pressure on US interest rates and the US dollar, European Central Bank executive board member Benoit Coeure said unconventional monetary policy may have to be used differently and more frequently if governments don’t act to boost the growth potential of euro-area economies.

And Bank of Japan Governor Haruhiko Kuroda said: “There is no doubt there is ample space for additional easing in each of the three dimensions”, referring to the BoJ’s package of asset buying, monetary base guidance and negative interest rates.

NAB’s global co-head of FX Strategy, Ray Attrill, said the theme of “divergent monetary policies” looks like being back in vogue and support an extension of Friday’s US dollar rally.

“The proximity to Friday’s US payrolls report and ongoing thin northern hemisphere holiday markets with the UK closed Monday will likely keep things cautious (but) this needn’t prevent AUD/USD having a look down below 0.75 this week,” Mr Attrill added.

Westpac’s Mr Speizer said Friday’s sharp reversal of intraday strength in the Australian dollar leaves the downside vulnerable to speculation of higher US interest rates.