Dollar stabilises in late trade

The local unit has lost US2c since its high point on Thursday night, but has stabilised above a key support.

The Australian dollar began to stabilise in late trade on Monday, after earlier weakening sharply against the US dollar during a fear-driven selloff.

Traders pulled out of the Australian dollar and plowed into the US dollar in response to a surprise jump of 40 per cent in the volatility index, which is known as the fear gauge in financial markets. They also sold stocks, bonds, oil and gold amid mounting signs that a long period of ultralow interest rates is drawing to a close.

The Australian dollar has lost around 2 cents from a high of US77.33 cents during European trading on Thursday.

On Monday it briefly slipped below a key support at US75.25c, but stabilised later. At 5pm (AEST), the currency was trading at US75.28c.

“Friday night’s big risk-off move, with a 40 per cent rise in the [volatility index], could signal a turning point in market sentiment,” said Rodrigo Catril, a currency strategist at National Australia Bank in Sydney.

“Investors are questioning the scope for further policy stimulus in Europe and Japan,” said Mr Catril.

He said the latest comments from Federal Reserve officials also bolstered expectations that US interest rates will rise eventually.

However, some currency strategists say the selloff looks overdone and that there’s a high chance the Fed will wait until at least December before lifting rates.

“If our house calls are anywhere close to correct, the US dollar is overbought,” said Greg Anderson, global head of currency strategy at BMO Capital Markets in New York. “We don’t think the Fed dares hike twice in 2016.”

NAB’s Mr Catril says that if Fed officials decide to stand pat at the next interest-rate decision in September, the Australian dollar could rise back above US77c.

Meanwhile, the local stockmarket closed at a two-month low on Monday, with $34.5 billion in valuation wiped from locally listed stocks.