Australian dollar surges as demand for greenback falls

October 02, 2007 07:22am

THE dollar has opened firmly above 89 US cents for the first time since 1989, and continues to test historical highs as demand for the US dollar falls.

At 7am AEST, the Australian dollar was trading at $US0.8942/45, up from yesterday's close of 0.8918/24.

Overnight, it traded between a low of $US0.8854 and a high of 0.8950 - equalling the level last traded on February 10, 1989.

Bank of New Zealand currency strategist Danica Hampton said the Australian dollar had more potential to rise, but would likely meet with some resistance at about $US0.8960.

She said it would be well bought on dips of $US0.8920.

Ms Hampton said the Australian dollar rose overnight on support from the carry trades as investor sentiment and risk appetite grew due to a strong rise in US stocks.

The Dow Jones industrial average finished up 191.92 points, or 1.38 per cent, 14,087.55 after surging to an all-time high of 14,115.51.

The Standard & Poor's 500 Index gained 20.29 points, or 1.33 per cent, to end at 1547.04.

The Australian dollar has attracted support because of its high yielding interest rate, with the differential between US and local rates expected to increase, further boosting the currency.

But while sentiment remains overwhelmingly in the Australian dollar's favour, US sub-prime concerns caused a brief sell-off in the Australian dollar overnight.

"We heard some negative news from UBS and Citigroup, and that caused a little bit of a carry trade liquidation, but the losses were short lived," Ms Hampton said.

US bank Citigroup said overnight its fourth quarter profit will drop by about 60 per cent because of $5.9 billion in losses and write-downs as a result of sub-prime and leveraged loans.

Meanwhile, UBS said it would write down the value of its assets by $US3.4 billion because of losses in sub-prime mortgages.

"The US equity market shrugged them off and finished really strongly, so renewed the appetite for carry trades," Ms Hampton said.

"And so we saw a lot of momentum buying and a solid demand for Aussie/yen helped support the Aussie."

Also overnight, the US Institute of Supply Management's (ISM) performance of manufacturing index (PMI) index for September was
slightly weaker than expected at 52 points compared with expectations of a 52.6 reading.

However, the result remained above the critical 50 level, which separates expansion from contraction, with economic activity in the sector growing for the eighth straight month.

There is no first tier local data due today to guide the market.

The board of the Reserve Bank of Australia (RBA) meets today, however, and will announce its interest rate decision tomorrow.

Interest rates are expected to remain at 6.50 per cent, but some economists are tipping another rate rise by early next year