Australian and Canadian Dollars Strengthen

April 22, 2003
By Jennifer Hughes in London

Investors continued to reward currencies with higher-yielding assets on Tuesday and both the Australian and Canadian dollars reached three-year highs against their US counterpart. The dollar fell to C$1.4433 against the Canadian dollar, its lowest level since February 2000.

"It's the same 'in search of yield' story," said Tim Mazanec, senior currencies strategist at Investor Bank and Trust in Boston, who gave C$1.43 as the next target for the pair.

Canada, faced with above-target inflation and strong domestic growth, is the only G7 country to have tightened monetary policy this year, and the central bank raised rates in two quarter-point hikes in March and April. The key overnight rate is currently at 3.25 per cent compared with 1.25 per cent for the federal funds rate in the US.

The Australian dollar rose to US$0.6228 against the greenback. Like Canada, relatively strong growth and high interest rates - the overnight rate is at 4.75 per cent - have buoyed the currency, which has risen more than 9 per cent against the US dollar this year.

The New Zealand dollar, where interest rates stand at 5.75 per cent, rose in tandem with its Australian counterpart but, at US$0.5612, failed to break new highs.

"There's still some residual concern about the probability of the RBNZ cutting rates this week," said Karen Pringle, senior currency strategist at ANZ investment bank, who noted also that liquidity could be low this week owing to the proximity of ANZAC day, on Friday, to Easter, which meant many investors were enjoying an extended break.

New Zealand's central bank is due to announce its policy decision on Thursday but few strategists believe the bank will cut rates yet. The euro continued its momentum from Monday's thin trade and reached new four-year highs against the yen and sterling, 18-month highs against the Swiss franc and a near six-week high against the dollar. The single currency peaked at Y131.76 against the yen, £0.6971 against sterling, SFr1.5096 against the Swiss franc and $1.1002 versus the dollar, not far short of March's four-year high. Strategists attributed the euro's gains to a difference in policymakers' attitudes.

"The eurozone is one of the only places where policymakers are trying to talk the currency up," said Shahab Jalinoos, foreign exchange strategist at UBS Warburg, who highlighted the intervention threats capping strength in both the yen and the franc.

Proprietary equity trading data from UBS Warburg supported market confidence in the euro. The report showed that net inflows into continental Europe over the past five weeks virtually matched net outflows from the US. Given the US current account deficit, the outflows signal the potential for further dollar weakness.

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