Australian dollar slips on US inflation data

The Australian dollar was weaker today as the US dollar gained ground on the back of Friday’s strong US inflation data.

The Australian dollar was weaker today as the US dollar gained ground on the back of Friday’s strong US inflation data and comments from US Federal Reserve chair Janet Yellen.

The US dollar and bond yields rose as US core inflation increased more than expected. US April CPI inflation rose 0.1 per cent from a month earlier and core inflation jumped 0.3 per cent from a month earlier, as core goods prices rose and core services costs accelerated.

On Friday, Ms Yellen said the central bank was on track to raise short-term interest rates this year, but would likely proceed slowly and cautiously because the job market hadn’t fully healed, inflation was low and growth had disappointed.

The comments, made just a few weeks before the Fed’s next policy meeting on June 16 and 17, were the latest indication that the central bank was unlikely to start raising rates next month but could do so later in the year if the economy picks up.

“I think it will be appropriate at some point this year to take the initial step to raise the federal-funds rate target and begin the process of normalising monetary policy,” Ms Yellen said in a speech.

At 5pm (AEDT), the Australian dollar was trading at US78.32c but traded as low as US78.04c in the morning, a three week low for the currency.

Locally, the market was focused on potential downside risks to the Aussie dollar.

Trading near US80c implies substantial overvaluation of the Australian dollar, according to Westpac calculations.

“The longer such Aussie dollar levels persist, the stronger the case for at least a more explicit easing bias. It is hard to see any renewed trade in the US80c lasting very long,” Sean Callow, currency strategist at Westpac, said.

Meanwhile, a survey of exporters and importers forecast more Aussie weakness.

Australian small- and medium-sized enterprises expect that the Australian dollar will fall below US75c by the first quarter of next year, according to the latest East & Partners Australian Dollar Barometer.