After rising to a high of US$0.6808 in early trade, the Australian dollar US dollar exchange rate is seen paring some of those gains as it heads into negative territory and towards the three-week low struck on Thursday. The Australian dollar is set for a 1.2% decline versus the US dollar across the week.
The Australian dollar has lost ground across the week, but most noticeable over the past two days as investors grow increasingly confident that the Reserve Bank of Australia will cut interest rates when they meet in October. Market participants expectations of a 0.25% rate cut from the central bank increased following the release of labour market data on Thursday. The data showed that unemployment in Australia ticked higher to 5.3% a 12-month high. The data also showed that whilst 34,700 jobs were created in August, there was also a fall of 15,500 in full time jobs.
|Why do interest rate cuts drag on a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower.|
The weaker labour force is a concern for the RBA. Consumers are reining in their spending as confidence dwindles. Further weakness in the labour market will only slow the economy more. The Australian economy grew at its slowest pace in the second quarter since the global financial crisis.
Dollar Advances on Mixed Trade Talk Reports
Whilst the dollar strengthened versus the Australian dollar in the previous session and extended those gains on Friday. The dollar moved higher despite the US central bank cutting interest rates, as market participants had expected, earlier in the week. The Fed gave no indication of further rate cuts across the year which investors interpreted as a more hawkish stance.
Today there is no high impacting economic data. US and Chinese officials are meeting in Washington for a second day today to prepare for trade talks to start again next month. Market participants are growing hopeful of a breakthrough in the dispute between the two economic powers. However, comments by Chinese state media that played down the possibility of a deal as unnerved market participants.
The US dollar is the reserve currency o the world. Economists and investors alike consider it to be a safe haven. When geopolitical tensions rise the dollar usually rises.
|What do these figures mean?|
|When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written:
1 USD = 0.6784 AUD
Here, $1 is equivalent to approximately A$0.67. This specifically measures the US dollar’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the US dollar.
Or, if you were looking at it the other way around:
1 AUD = 1.4739 USD
In this example, A$1 is equivalent to approximately $1.47. This measures the Australian dollar’s worth versus the US Dollar. If the US dollar number gets larger, it’s good news for the Aussie dollar.
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