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Australia, NZ dollars hit one-week low on U.S. rate hike risk

05/12/2021 | 11:42pm EDT

SYDNEY, May 13 (Reuters) - The Australian and New Zealand dollars sank to one-week lows on Thursday against their U.S. counterpart, which was buoyed by expectations of earlier-than-expected policy tightening by the Federal Reserve in response to rapid inflation.

U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints, data showed on Wednesday.

Traders now await U.S. weekly jobless claims data due later in the day and retail sales numbers on Friday to determine whether consumer prices will continue to rise.

The Australian dollar, a liquid gauge of risk, was last at $0.7727, after touching its lowest level since May 6 of $0.7718 earlier in the session. It had slid 1.5% on Wednesday when the U.S. inflation data was released.

In Australia, inflation is expected to stay under the central bank's 2-3% target band for a long time to come, despite solid economic recovery.

The Reserve Bank of Australia (RBA), last week, emphasised the economy was well short of full employment and wage growth is just too slow. Annual wages growth in Australia is at a record low of 1.25%, compared with 2% for Europe and nearly 3% in the U.S.

The RBA has said it would not increase the cash rate from the current record low of 0.1% until inflation was sustainably within its target band.

The New Zealand dollar hit a one-week trough of $0.7152 before nudging up a bit to $0.7171.

The kiwi was supported by hopes that the country would re-open its economy, after Prime Minister Jacinda Ardern said she is exploring quarantine-free travel with other countries.

Analysts said volatility in risk assets was here to stay.

"Markets were already expecting a rise in inflation – the big question is how sticky that inflation is. That has not been answered today, nor will it be answered for several months," said Seema Shah, chief strategist at Principal Global Investors, referring to the U.S. data.

"Nonetheless, risk markets will continue to be whipsawed by inflationary concerns over the coming months and investors would be wise to introduce some inflation protection into their portfolios."

New Zealand government bonds slipped in line with U.S. Treasuries, sending yields 4 basis points higher.

Australian government bond futures fell too, with the three-year bond contract down 1 tick at 99.745. The 10-year contract eased 3 ticks to 98.2500. (Editing by Rashmi Aich)

© Reuters 2021
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