Dollar slides below US72 cents

The local unit has slumped in the wake of Glenn Stevens’ speech, and amid crumbling iron ore prices.

A crumbling iron-ore price and a warning from the central bank that inflation is “too low” put the Australian dollar into a tailspin on Tuesday, back below US7200, the lowest since the start of March.

At 5.01pm (AEST), the Australian dollar was trading at US71.63c, compared with US72.25c at the same time on Monday.

China metal futures markets tumbled, with iron-ore and steel rebar futures falling to their lowest levels in nearly three months, erasing all the gains from the April rally and reminding investors of Australia’s exposure to the slowing Chinese economy.

The main iron-ore futures contract on the Dalian Commodity Exchange dropped 2.5 per cent to 350 yuan a ton. Steel rebar and iron-ore futures prices have sunk 30 per cent and 26 per cent, respectively, from their April 21 peak.

The bursting of the metals futures bubble comes as steel production surges, and as expectations for Chinese government policy reverse. Investors previously believed Beijing would keep flooding the market with cheap credit, but no longer think so.

But it was comments by Reserve Bank of Australia Governor Glenn Stevens that brought sellers charging off the sidelines.

Speaking at a business luncheon, Mr Stevens -- who leaves the RBA’s top job in September -- said growth and employment in the country were solid, but inflation remains “a bit too low.”

Currency traders took that as a signal that current market pricing for further interest-rate cuts in the near term was about right. Most economists have bets the RBA will cut again in August after seeing inflation data for the second quarter in July.

The RBA cut its key rate on May 3 to a record low 1.75 per cent, bringing it closer to its global peers struggling to ignite growth and inflation. The cut followed news of deflation in the first quarter for the first time in Australia since the financial crisis in 2008.

Expectations are also rising that the US Federal Reserve will increase interest rates in June. Market pricing has seen the odds of a June rate increase in the US jump from less than 5 per cent two weeks ago to 32 per cent now, with a July increase 54 per cent priced in.

Higher US rates would spark gains by the US dollar, sending the Australian dollar lower, likely toward US70c.

Sean Callow, currency strategist at Westpac Bank said the Australian dollar might find its feet soon. Even as the iron-ore price continues to drop, the wider basket of Australia’s export commodities is still higher over the year, he noted.