Dollar punches through US87 cents

Business Materials 26 September 2007 04:29 (UTC +04:00)

(News.com.au) THE Australian dollar opened stronger today after punching through the 87 US cents mark during overnight trade on the back of some weak US economic data.

At 7am AEST, the dollar was trading at $US0.8730/36, up from yesterday's close of 0.8655/60.

Overnight, it traded between a low of $US0.8612 and a high of 0.8740.

New York-based senior currency strategist with Westpac, Richard Franulovich, said the Aussie weakened towards the end of the Asian session yesterday as an International Monetary Fund (IMF) report on credit market conditions sparked a fresh bout of risk aversion.

The IMF report and news out of the UK of a struggling deposit protection scheme, as well as a report that US home builder Lennar Homes had overestimated its third quarter earnings, all conspired to see currencies like the Aussie and New Zealand dollar lose ground, he said.

But the domestic unit then gained more than half a US cent during the New York session as the US dollar was sold off following the release of some weak economic data.

US existing home sales fell 4.3 per cent in August as buyers had trouble getting mortgages amid financial market turmoil, while consumer confidence slid to a near two-year low in September amid weakening business and job market conditions.

"The home sales data was pretty much in line with expectations but consumer confidence was weaker than we thought it would be," Mr Franulovich said.

"The (New York) session began with carry trade unwinding then morphed into a broad US dollar sell-off ... the euro traded up to new highs and the Aussie could do nothing but rally in that environment."

The US dollar has weakened sharply since last week's aggressive move by the US Federal Reserve to cut the federal funds rate by 50 basis points to 4.75 per cent.

Lower interest rates can weaken a currency by giving investors lower returns on investments denominated in that currency.

The greenback has since has plunged to record lows against the euro and reached parity with the Canadian dollar for the first time since 1976.

The Australian dollar has also benefited as investors look to put their money into markets where interest rates are rising and the economic fundamentals are better.

At 9am AEST, the Reserve Bank of Australia's trade weighted index (TWI) was at 69.4, up from yesterday's 68.8.