TOKYO, Oct 4 (Reuters) - Australia's dollar sank on
Tuesday after the nation's central bank surprised markets with a
smaller-than-expected interest rate hike while sterling extended
its recovery a day after the British government's about-face on
controversial tax cuts.
The Aussie slumped as much as 0.97% and was last
trading 0.5% weaker at $0.6482.
The Reserve Bank of Australia said it decided to slow the
pace of tightening because the cash rate had increased
substantially in a short period of time, although policymakers
left the door open to additional hikes.
"Obviously the RBA hasn't been persuaded by what other
central banks are doing, which does make the comment that they
don't have any concerns about the exchange rate down here," said
Ray Attrill, head of FX strategy at National Australia Bank in
"There's no evidence yet that other central banks are about
to step down the aggression with which they are tightening
policy, (so) I think it makes sense for Aussie to be below 65
for the time being."
Heading into the RBA decision, the risk-sensitive currency
had been tracking a little below the top end of its range since
Sept. 23 at $0.6537. It sank to a 2-1/2-year low of $0.63635
last week, weighed down by global recession worries.
Sterling rose 0.08% to $1.1333 after earlier
reaching $1.13435, the highest level since Sept. 22, the day
before the new government roiled markets with its mini-budget of
massive tax cuts funded by expanded borrowing.
British Prime Minister Liz Truss was forced to back down
from the plan on Monday amid a party rebellion.
The euro also hovered close to the highest since
Sept. 22, last changing hands 0.15% stronger at $0.9838.
The U.S. dollar lost some support from a slide in Treasury
yields overnight after local economic data showed a slowdown in
manufacturing, hinting that aggressive Federal Reserve rate
hikes are already being felt.
The dollar index - which measures the currency
against six peers including sterling and the euro - was about
flat at 111.55, not far from Monday's low of 111.46, a level
last seen on Sept. 23. It had soared to a two-decade high of
114.78 last Wednesday.
On Monday, the Institute for Supply Management's (ISM)
survey showed U.S. manufacturing activity was the slowest in
nearly 2-1/2 years in September as new orders contracted, with a
measure of factory gate inflation decelerating for a sixth
Commonwealth Bank of Australia, though, predicts sterling's
respite will be short-lived and that the dollar rally has
further to run.
Over the coming month, "USD can remain elevated as the FOMC
(Federal Open Markets Committee) continues to hike aggressively
and (the) global economy enters recession," CBA strategist
Joseph Capurso wrote in a client note.
He also noted "global recession risks can push GBP down
significantly" and "the weak UK economic outlook will keep GBP
under pressure" over the medium-term.
The greenback was 0.14% stronger at 144.77 yen,
keeping below 145 after briefly popping above that level on
Monday for the first time since Japanese authorities intervened
to support their currency on Sept. 22.
Japanese finance minister Shunichi Suzuki repeated on Monday
that authorities stand ready for "decisive" steps in the foreign
exchange market if "sharp and one-sided" yen moves persist.
New Zealand's kiwi dollar weakened 0.34% to
$0.56995, although that was still close to the top of its range
since Sept. 26. The Reserve Bank of New Zealand decides policy
on Wednesday, and the market is fully priced for a half-point
bump, while giving 29% odds on a 75 basis-point increase.
(Reporting by Kevin Buckland; Editing by Sam Holmes and Lincoln