The Australian dollar pulled away from one-year highs on Friday, but found solid support just below 87 US cents as investors remained confident about an economic recovery and that US rates will stay at rock-bottom levels.
At the local close, the dollar was trading at $US0.8686, down from yesterday’s close of $US8764. Lower stocks and commodities also took some of the wind from the high-flying Aussie.
It has gained around 2 per cent in the past two weeks, helped by expectations of rising local interest rates, improved investor confidence in riskier assets and higher commodity prices.
The battered US dollar received a bit of a reprieve on Friday, with the dollar index rising from one-year lows
on short covering, but the broad downtrend remained intact after a batch of mixed economic numbers.
The US dollar index has shed around 2 per cent this month on mounting speculation the greenback was fast becoming the preferred funding currency for carry trades.
"The US dollar has achieved "funding currency" status with zero interest rates and ample liquidity across the financial system," said Warren Hogan, chief economist at ANZ.
"Investors are borrowing money in dollars, usually on very short terms to buy into "risky" trades; in essence a carry trade. It is this dynamic that will see short-term fluctuations in the US dollar highly correlated with risk appetite."
In carry trades, investors borrow in low-yielding currencies to fund purchases in assets with higher returns like stocks, commodities and high-yielding currencies like the Australian and New Zealand dollars.
Next week, investors are likely to get more clues about monetary policy in the US when the Federal Open Market Committee meets.
The Federal Reserve is likely to express more confidence in the economic outlook, but just like most other major central banks, leave interest rates on hold at low levels given lingering uncertainties and low inflation.
The Aussie slipped against the yen, falling to 79.10 yen from 79.64 on Thursday, as traders cut short positions ahead of a long weekend in Tokyo.
Australian bond futures were higher, supported by US Treasuries which climbed after a mixed batch of US economic data backed views that the recovery was going to be tepid and rates were likely to remain low.
Australian three-year bond futures were 0.030 points higher at 95.13, while the 10-year bond contract added 0.045 points to 94.66.
