The Australian dollar is extending losses for a third straight session versus the US dollar. The Australian dollar US dollar exchange rate closed Tuesday down 0.6% at US$0.6708. The pair is trading a further 0.4% lower in early trade on Wednesday.
Pessimism over the health of the global economy, in addition to an interest rate cut by the Reserve Bank of Australia has weighed on demand for the Australian dollar, pulling it close to a decade’s low against the US dollar.
A slew of weak data from Europe and the US on Tuesday sparked global slowdown fears. Inflation in the eurozone is stagnant whilst US and UK manufacturing output remains in contraction, unnerving investors over the outlook for the global economy. The Australian dollar is considered a risk on currency, this means that in times of reduced risk appetite, investors look to sell out of the Australian dollar.
In addition to heightened global slowdown fears, the RBA cutting the interest rate and the prospect that the central bank could slash rates further is also weighing on demand for the Australian dollar.
|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.|
US Recession Fears Weigh On The Dollar
The US dollar was broadly out of favour in the previous session, although it still managed to advance against the Aussie dollar. The US dollar was under pressure following the release of downbeat US manufacturing data. Figures showed that the US manufacturing sector unexpectedly remained in contraction for a second straight month as output slumped to the lowest level in a decade. The PMI declined to 47.8 versus analyst’s expectation of 50.1.
Delving deeper into the figures, the new orders and employment components of the report pointed to broad based weakness in the sector as the ongoing US — China trade dispute and slowing global demand hits. Investors are growing increasingly concerned that the Fed will need to cut interest rates again by the end of the year to support the economy. This is pulling the dollar lower.
Investors will now turn their attention to the US ADP private payroll report. Analyst and investors pay close attention to this report because of its strong correlation to the US non-farm payroll data, to be released on Friday; the most closely watched macroeconomic release on the month. A weak reading today could bolster recession fears. Bad news for the dollar.
|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.