Aussie dlr slides to 1-wk low on recession fears

Wed, Oct 22 2008, 06:05 GMT
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SYDNEY, Oct 22 (Reuters) - The Australian dollar dived towards recent multi-year lows on Wednesday as fresh fears about a global recession triggered a wave of risk aversion and overshadowed strong domestic inflation numbers.

Investors dumped higher-yielding currencies, stocks and commodities. Tokyo's Nikkei share average fell more than 5 percent and the euro slumped to a 23-month low against the U.S. dollar, while the safe-haven yen advanced broadly, along with government bonds.

The financial market turmoil overshadowed a stronger-than- expected rise in consumer prices. Data on Wednesday showed average annual core inflation in Australia jumped to hit 17-year high of 4.7 percent, way above the Reserve Bank of Australia's (RBA) long-term target of 2 to 3 percent.

But the data was not seen preventing the central bank aggressively cutting rates in coming months to cushion Australian households from the adverse impact of a looming global slowdown.

The RBA has already said it expects inflation to ease in the coming months as a slowing domestic economy eventually works to cool price pressures.

"Today's outcome doesn't change the scope for more monetary policy loosening. We retain our forecast of a 50 basis point reduction in the official cash rate next month," said Amanda Tan, treasury economist at St George Bank.

"The deeper financial crisis has seen inflation outcomes across the globe take a backseat. Heightened risks to growth and the commodity price falls that have resulted from this indicates greater downward influence on inflationary pressures."

By 4:15 p.m. (0515 GMT), the Aussie had shed more than 4 percent to $0.6674, from $0.6947 late here on Tuesday. It fell to $0.6635 during the day, within sight of a 5- year low of $0.6330 struck earlier this month.

Against the yen, the Aussie dived to 66.56 yen, from 70.56 yen late here on Tuesday, as investors continued to unwind risky leveraged carry trades. It had slumped to a six-year low of 63.03 yen earlier this month.

Also weighing down on the Aussie were weaker commodities. Base metals and oil took yet another hammering in Asian trade as worries about a global slowdown forced investors to cut exposure to natural resources. Australia is a big exporter of commodities.

Australian bond futures, especially at the shorter end, were supported by expectations of further rate cuts by the RBA and safe-haven inflows.

Investors are pricing in at least a 50 basis point cut, with some still expecting a cut before its next policy meeting on Nov. 4. Earlier this month, the central market stunned financial markets by slashing rates by 100 basis points.

Three-year Australian bond futures rose 0.07 points to 95.505, while the 10-year bond contract added 0.005 points to 94.835.

----------------(Snapshot at 4:10p.m./0510MT)------------------

FUTURES CASH YIELD

90-DAY BILL<YBAc1> (DEC) 95.070(+0.040) 5.85 (5.87)

3-YR BOND (DEC) 95.505(+0.070) 4.45 (4.52)

10-YR BOND (DEC) 94.835(+0.005) 5.15 (5.16)

AUD/USD 0.6674 (0.6947) US 10-YR 3.71 (3.86)

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AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD

USD +258 (+256) +144 (+129) *FUTURES +0.670 (+0.610)

CAD +200 (+206) +146 (+143) *AUD 2-YR/10-YR SPREAD

NZD -148 (-138) -81 ( -79) *CASH +99 ( +90)

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(Reporting by Anirban Nag; Editing by James Thornhill)

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