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Australian dollar caught in rut, bonds surge to two-year high

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[SYDNEY] The Australian dollar traded narrowly on Wednesday after ending 2018 deep in the red as worries over global growth and Sino-US trade relations sent investors scuttling to the safety of bonds.

The Australian dollar held at US$0.7038 after trundling between US$0.7017 and US$0.7077 over the past week.

The Aussie skidded 3.4 per cent in December to clock its worst monthly performance since February 2018. It tumbled almost 10 per cent in 2018, wiping out the previous year's 8.7 per cent gain.

Safe haven bonds rallied in line with US Treasuries. Australian government bond futures jumped to a two-year peak, with the three-year bond contract rising two ticks to 98.22. The 10-year contract climbed to the highest since mid-2017 to 97.705.

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Sentiment across world markets have been dampened by an ongoing tariff war between the United States and China. That has particularly affected the Aussie as the country's export-driven economy is heavily leveraged to global trade.

Survey data out of China on Monday showed manufacturing activity contracting for the first time in two years, pointing to an economic slowdown.

Further adding to the bearish case for the Aussie, the Reserve Bank of Australia (RBA) is seen all but certain to keep rates at record lows for another year, and might even be forced to cut.

The RBA has held rates at 1.5 per cent since last easing in August 2016 awaiting a revival in inflation and a further improvement in the jobless rate. It last tightened policy in November 2010 to 4.75 per cent.

Some analysts say the Aussie could rally from here given the Fed is likely to tread carefully on policy after a two-year tightening campaign. But global growth concerns, including a potential recession in the United States, and falling commodity prices are a headwind for the currency.

The kiwi dollar was last at US$0.6713, hovering near a recent seven-week trough of US$0.6693. It ended December down 2.5 per cent after a solid 5.6 per cent surge the previous month.

For the full year, the kiwi stumbled 5.4 per cent for its worst annual performance since 2015.

Trading was light in New Zealand with domestic markets shut for the New Year's holiday.

REUTERS