US Dollar Dumped As Fed Keeps Lid On Interest Rates

Top of the pile . . . the Aussie dollar is set to break through US110 cents as the greenback is sold off. Photo: AFP/Torsten Blackwood

THE United States' radical policy of printing money while keeping interest rates near zero is taking a growing toll on the world's reserve currency, prompting financial markets to abandon the greenback.
A broad sell-off in the US dollar yesterday drove the Australian dollar to a fresh post-float record of US109.48¢, continuing its recent stellar performance.
The move came after the US Federal Reserve cut its domestic growth forecast and said it would keep interest rates between zero and 0.25 per cent for an ''extended period''.

The Fed's chairman, Ben Bernanke, also confirmed the central bank would end its $US600 billion ($550 million) program of buying government bonds, known as quantitative easing, at the end of June.
The chief currency strategist at Westpac, Robert Rennie, said that by the time quantitative easing had ended the Fed would have increased its balance sheet by $US2 trillion.
This extra supply of US dollars, alongside the prospect of ultra-low interest rates, was likely to fuel further rises in the Australian dollar, Mr Rennie said.
''One of the stated aims of quantitative easing was never to debase the value of the US dollar, but if it's a byproduct, then so be it,'' Mr Rennie said.
''I see little to stop the Australian dollar pushing through the $US1.10 level and little to stop the euro from cracking through $US1.50.''

The chief economist at JP Morgan, Stephen Walters, said news that the Fed would cease buying bonds at the end of June had also fanned market fears that there would be a shortage of buyers after this date.
Some investors thought the lack of buyers could push up interest rates from their low levels, which could threaten the US economic recovery, Mr Walters said.
However, he dismissed these fears as unwarranted, saying there were clearly enough buyers for Treasury bonds aside from the US government.
''It's just a knee-jerk reaction. It's not a long-term argument, but that's the way the market is interpreting it,'' Mr Walters said.
Despite the US dollar sell-off, Nomura's chief economist, Stephen Roberts, said the US economy's prospects were looking up thanks to its unconventional policies.
Ultra-low interest rates were likely to help growth in the US to accelerate towards 3 per cent this year, he said, and inflation remained tame.

Analysts think the Aussie dollar will continue to hold the upper hand over the greenback until there is a narrowing in the interest rates charged in the two countries.
While US rates were likely to stay at their depressed levels for now, Mr Roberts predicted the Reserve Bank would soon opt to raise the cash rate from 4.75 per cent in response inflationary pressures.
''We are clearly getting closer to the point where the next rate move is up, and that marks us out as different from the US,'' Mr Roberts said.


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