Aussie dollar drops as RBA sounds dovish tone

London

AUSTRALIA'S dollar fell on Tuesday (Nov 2) after the Reserve Bank of Australia (RBA) sounded a more dovish tone than expected, in the first of several meetings of central banks this week.

Attention now turns to the US Federal Reserve, which kicks off its two-day meeting on Tuesday and is expected to announce the start of tapering its asset purchases. Markets are also pricing in an interest rate rise at the Bank of England meeting on Thursday.

Investors in recent weeks have priced in a wave of tightening from central banks as they bet policymakers are sufficiently concerned about rising inflation to end pandemic-era levels of easing.

Australia's central bank did not display that hawkish pivot many had expected, sending the Aussie dollar down as much as 0.8 per cent to US$0.7457, its weakest since Oct 22.

The RBA stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.

Analysts said the message was still more hawkish than previous RBA meetings, even if not as hawkish as markets had anticipated.

"Unlike other central banks (like the ECB recently), the RBA's message was successful in at least marginally scaling down hawkish bets, although markets are still pricing in 76bp (basis points) of tightening in the next 12 months," said ING analysts.

New Zealand's dollar also dropped sharply, losing 0.8 per cent to US$0.7130, a 2-week low.

Currency markets elsewhere largely treaded water as they waited to see whether policymakers were ready to dial back stimulus.

The US dollar index traded marginally higher at 93.996.

The euro edged 0.1 per cent lower to US$1.1593.

Sterling was on the back foot, slipping 0.3 per cent to US$1.3627.

The US dollar weakened 0.3 per cent to 113.68 yen, continuing to consolidate below an almost 4-year peak of 114.695 reached on Oct 20.

Elsewhere the Swiss franc briefly hit a new 18-month high versus the euro. The single currency dropped to as weak as 1.0544 francs - the lowest since May 2020 - before it bounced back to trade at 1.0581, up 0.3 per cent on the day.

The franc has been strengthening versus the US dollar too, although it was down 0.3 per cent on Tuesday. REUTERS