Australian Dollar Slides as Central Bank Keeps Rate Unchanged

By Paul Dobson and Yasuhiko Seki

Feb. 2 (Bloomberg) -- The Australian dollar slid after the nation’s central bank unexpectedly avoided raising interest rates, prompting traders to favor other higher-yielding currencies such as the Norwegian krone and South African rand.

The Aussie fell against all 16 of its most-traded peers monitored by Bloomberg, dropping to the lowest level in almost six weeks versus the U.S. dollar. Reserve Bank of Australia Governor Glenn Stevens left the overnight cash rate target at 3.75 percent, confounding the prediction for a quarter-point increase from all 20 economists surveyed by Bloomberg.

“The foreign-exchange market is definitely seeking yield following the Australian rate decision,” said Paul Robson, a senior currency strategist in London at Royal Bank of Scotland Group Plc.

Australia’s currency slid 1.3 percent to 88.03 U.S. cents as of 10:24 a.m. in London, after weakening to 87.81 cents, the lowest level since Dec. 23. It fell 1.1 percent to 79.89 yen.

The dollar traded at $1.3946 per euro, from $1.3931 in New York yesterday, when it rose to $1.3853, the strongest since July 8. The U.S. currency was at 90.77 yen, from 90.61, and the yen traded at 126.62 per euro, from 126.24.

The RBA’s Stevens became the first central banker among the Group of 20 nations to raise borrowing costs last year, boosting them three times. Officials in the U.S., the U.K. and Europe kept their benchmark rates at record lows. The difference in rates helped make the Australian dollar the top performer versus its U.S. counterpart from Sept. 1 though yesterday.

Rate ‘Surprise’

“It’s a surprise they didn’t hike today,” said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. The decision “should help ease some of the downward pressure on the U.S. dollar” because “the market last year got ahead of itself expecting other central banks to tighten more aggressively than the Federal Reserve,” he said.

The Aussie will probably depreciate to 85 U.S. cents as markets begin to bet on rate increases by the Fed, UBS AG said. The Swiss bank advised investors sell the Aussie against Norway’s krone before the Norges Bank meets tomorrow. The “risk clearly” is that the Oslo-based central bank surprises by raising borrowing costs, said Mansoor Mohi-uddin, chief currency strategist at UBS in Singapore.

The Norwegian central bank will keep its main rate unchanged at 1.75 percent, according to all 16 analysts surveyed by Bloomberg.

ECB Meets

The European Central Bank meets the following day and will also keep its main rate unchanged, at 1 percent, according to all 55 economists in a separate Bloomberg survey. The Fed’s target rate for overnight loans between banks is a range of zero to 0.25 percent.

The rand strengthened 0.5 percent to 7.4588. The South African central bank’s main interest rate is 7 percent.

Traders had put the odds of an increase in Australia’s rate at 74 percent, according to contracts traded on the Sydney Futures Exchange.

Borrowing costs in Australia will be “adjusted further” to keep inflation within the central bank’s target range of 2 percent to 3 percent “if economic conditions evolve broadly as expected,” Stevens said in a statement today.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net