MW: Dollar and yen retreat after Australia cuts rates
Move spurs speculation of coordinated global easing
By William L. Watts, MarketWatch
LONDON (MarketWatch) - The Japanese yen and the U.S. dollar retreated Tuesday, giving back some of the previous day's gains, after Australia's central bank delivered a surprisingly large rate cut, which in turn triggered speculation that a coordinated global easing of interest rates may be on the way.
The Reserve Bank of Australia cut its benchmark policy interest rate by a full percentage point, to 6% from 7%, citing disarray in global financial markets and mounting evidence of a sudden deceleration in economic growth among Australia's major trading partners in Asia.
Analysts were expecting a half-point cut. See full story.
Prospects for a coordinated move by major central banks are "definitely a possibility" and seem "to be a growing one," said Daragh Maher, currency strategist at Calyon Bank.
With the U.S. adopting a $700 billion bailout plan and a continuing flood of liquidity into money markets by central banks failing to thaw frozen credit markets, economists see coordinated rate action as among the next round of potential strategies.
But a coordinated move isn't a sure thing, Maher and other strategists said.
"While we think the possibility is non-negligible, it is likely that central banks may hold off until their respective policy meetings before acting," wrote fixed-income strategists at HBOS.
Nevertheless, the speculation was sufficient to spur a modest revival of risk appetite and prompted some modest profit-taking on massive gains seen by the yen on Monday and lesser gains seen by the dollar. Monday's steep global equity sell-off provided a major boost to the Japanese currency.
The yen has traded in close correlation with levels of risk aversion, rallying sharply during bouts of extreme financial turmoil.
The yen on Monday posted its biggest ever one-day rise against the euro and its largest single-day jump against the greenback in a decade, at one point nearing the psychologically crucial 100-yen level.
The yen was holding a small gain against the European single currency at 137.52 yen. The dollar rose to 101.70 yen from 101.28 yen in North American trade late Monday.
The euro rebounded to $1.3531 against the dollar from $1.3492. The British pound was around 0.4% lower against the dollar at $1.7357.
The dollar index , a measure of the greenback against a trade-weighted basket of currencies, slipped to 81.300 from 81.593 late Monday.
The dollar has also enjoyed a "partial" safe-haven status, Maher said.
Given massive uncertainty over the fate of the banking sector and the global economy, the yen, and to a lesser extent the dollar, should remain supported, strategists said.
"Despite yesterday's late-session rally, markets are still clearly jittery for now and barring a policy backstop could well continue to head lower," said Martin McMahon, currency strategist at Credit Suisse in Zurich.
"We maintain a focus to the downside for [euro/Swiss franc} and likewise [euro/U.S. dollar] for now as the U.S. unit continues to gain from the deleveraging across markets and fears over the European banking sector," he said.
The pound remained under pressure but saw little movement after August manufacturing output and industrial-production data showed larger-than-expected declines.
Output fell 0.4% on the month and 1.9% from a year earlier, the Office for National Statistics said, compared with expectations for a 0.3% monthly decline and 1.7% year-on-year fall.
Industrial production fell 0.6% between July and August and was down 2.3% compared with August 2007. Expectations were for a 0.2% monthly fall and a 2% annual decline.
The Bank of England's rate-setting Monetary Policy Committee meets Thursday amid widespread expectations it will cut its key lending rate by at least a quarter percentage point to 4.75%.