G7 Silence Triggers Greenback Fall

Sydney Morning Herald

Tuesday October 23, 2007

Jacob Saulwick

THE US dollar fell to a new low against the euro after a meeting of finance tsars flagged no official opposition to the weakness in the US currency.

Money market traders dumped the US dollar when the communique of the Group of Seven finance ministers contained no mention of problems stemming from the brittle greenback.

The Australian dollar also dipped sharply in morning trade, punished because of the weakness in US equities. But the local currency moved higher later in the day, with traders keen to snap up any dip of the Australian dollar against its US equivalent.

"I guess there's a feeling that we are going to see some more protracted falling in the US dollar," said ANZ's senior currency strategist, Tony Morriss.

With the US economy teetering on the brink of recession, an interest rate cut by the US Federal Reserve this month is considered a near certainty.

A rate cut would be another big blow to the US dollar. Yesterday it hit $US1.43 per euro, its lowest since the European currency came into existence.

The Fed's former chairman Alan Greenspan pitched into the debate, telling a Washington audience that the dollar's fall could reflect the reluctance of foreigners to keep buying US debt.

While the global finance chiefs kept mum on the US dollar, they singled out the Chinese yuan, calling for Chinese authorities to allow it to appreciate faster.

The pressure on the Chinese currency settings rippled through the local market. Analysts from Goldman Sachs JBWere noted speculation that China could be looking at a 6 per cent currency revaluation.

This seemed to contribute to a sell-off in resource stocks, with mid-cap resources the hardest hit, the analysts said.

Currency and bond traders will sweat on tomorrow's release of inflation figures for the September quarter.

If underlying inflation nudges above 0.7 per cent for the quarter, this could be enough to prompt the Reserve Bank board to lift interest rates when it assembles on November 6.

The chance of an interest rate rise increased to 52 per cent from 40 per cent last week, as measured by Credit Suisse's analysis of futures markets.

This was after a measure of prices paid to producers and wholesalers showed inflation running higher than expected.

The Australian dollar finished at US89.04c, a gain of US0.03c from Friday.

But the dollar lost ground on the trade weighted index, sliding four points to 70.1.

© 2007 Sydney Morning Herald

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