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AU Dollar sinks below parity as debt crisis roils markets

Categories: Markets

The Australian dollar has dipped below parity with the US currency after another wild night on global markets.
The dollar was recently buying 99.85 US cents, down from 101.04 US cents, after US and European stocks sank on fears the debt crisis in the euro zone could spiral out of control after Spain and France paid a higher price at their debt auctions.
The dollar neared parity yesterday afternoon but as the session wore on it slowly recovered lost ground to close locally at 101.04 US cents. It’s the first time the dollar has sunk below parity since October 12. It has also lost ground against other currencies, sinking below 77 yen, 74.2 euro cents and 63.4 pence.

The Australian dollar is down 1.5 per cent against the greenback so far this week and is heading for its third consecutive weekly decline.

Risk exodus

FT Forex director of currency research Kathy Lien said there had been an exodus out of high-risk, high-yield currencies, like the Australian dollar in the past week.

“This weakness in the Aussie has all to do with the continued tensions in the euro zone,” Ms Lien said from New York.

“That’s based on concerns of the affect that Europe’s trouble will have on the world in general and the prospect of slower growth, not just in Europe or the US, but also in Australia as well.

“So, even though the outlook for Australia is better than any other country, the currency is suffering from global risk aversion.”

Ms Lien said there were rising concerns that euro zone government debt woes would spread beyond Greece, Ireland and Portugal.

“The main catalyst is that Italy could be forced to knock on the doors of France and Germany, and be the next country to ask for aid,” she said.

“There’s also a risk of the ratings agencies downgrading France and Italy.”
The Australian share market, meanwhile, is off about 0.9 per cent for the week and about 1 per cent for November – despite the volatility on overseas markets.

93 US cents

Toronto-based CIBC World Markets economist Andrew Grantham believes the Aussie was overdue for a fall, based on lower interest rate expectations and slightly slower growth from China.

Financial markets were this morning pricing in the equivalent of six 25 basis-point rate cuts over the next 12 months by the RBA. If such cuts eventuate, the RBA’s cash rate would be back down to 3.25 per cent by November 2012, barely above the lowest level reached during the global financial crisis in 2008-09.

“Ongoing concerns surrounding Europe and, potentially more relevant for Australia, the prospect of slower growth in China still point to short-term weakness for the Aussie dollar,” Mr Grantham said.

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