Dollar sinks as interest rates eyed

Traders remain jittery ahead of GDP data, amid speculation over RBA and Federal Reserve policy.

The Australian dollar was sharply lower in late trade on Monday as iron ore prices fell in Asia and the US dollar found support from hawkish remarks by US Federal Reserve Chair Janet Yellen.

Traders are also jittery ahead of first-quarter Australian GDP data on Wednesday. Economists expect a robust result, but any hint of weakness will see bets on a near-term interest rate cut rise.

A holiday in the US is also expected to damp trading for the first half of the week.

At 6pm (AEST) Monday, the Australian dollar was trading at US71.70 cents, compared with US71.87 at the same time on Friday.

Technically, the Aussie also remains weak. Traders said it remains below its 200-day moving average while Fibonacci analysis suggests a move toward US$0.7000 is likely.

China’s Dalian iron ore futures fell as much as 4.9 per cent in Asia to lowest levels since Feb. 2015. Iron ore is Australia’s biggest export.

The US dollar advanced to a one-month high against the yen during Asian trade, tracking its weekend gains after the Fed’s Yellen signaled an interest-rate rise was likely coming soon.

Ms Yellen, speaking at an event at Harvard University, said it would be appropriate for the Fed to raise rates “gradually and cautiously” if the economy and the labor market continued to improve.

The comments come after more junior Fed officials have suggested markets are underpricing the risk of a near-term rate increase by the US central bank.

ANZ said in a research note that Ms Yellen’s remarks weren’t really that ground-breaking but they were certainly market relevant.

While Yellen just corroborated earlier views expressed by her Fed colleagues, “it does sound more meaningful when it comes from the boss,” ANZ added.

All eyes remained on Wednesday’s first quarter GDP growth data. Economists are forecasting solid on-quarter growth of 0.7 per cent, and an on-year result of around 2.7 per cent.

Rising exports of iron ore and gas are expected to make a big contribution to growth in the quarter. But while volumes of exports are rising, prices paid have tumbled, pressuring income growth across the economy.

A sell-off in the Australian dollar is likely if the GDP growth numbers come in below expectations. The Reserve Bank of Australia cut in interest rates on May 3 for the first time in a year citing low inflation. Weak growth would simply add to the reason to keep cutting, traders said.

Dow Jones newswires