Australian Dollar Hits 4-Month High After RBA Keeps Overnight Cash Rate at 3.5%

The Australian dollar closed Tuesday at 105.76 US cents from 106.60 on Monday. It is a four-month high which analysts attributed to the decision of the Reserve Bank of Australia's (RBA) to retain the overnight cash rate at 3.5 per cent.

The Australian dollar actually reached an intra-day peak of 106 US cents, said Commonwealth Bank currency strategist Joseph Capurso. He said that Australian bond yields also rose which support the boost of the currency, which he attributed to the market taking the RBA announcement more favourably compared to the July rate decision.

Mr Capurso forecast the Australian dollar to remain at current levels but said global conditions especially developments in Europe would continue to have a bearing on exchange rates.

The RBA rate decision did not surprise economist and analysts who were expecting no movement in the key lending rate.

"With inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate," RBA Governor Glenn Stevens said in a statement.

He added that the global economic growth had softened in recent months and commodity prices had declines, while the labour market logged moderate employment growth despite job cuts in some sectors.

Despite the introduction of the carbon tax on July 1, prices of consumer goods went up only 1.2 per cent.

"The most significant area of weakness continues to be Europe, where economic activity has been contracting and policymakers confront the very difficult task of seeking to put both bank and sovereign balance sheets onto a sound footing, while promoting conditions for improved long-term growth," Mr Stevens added.

Due to the Australian dollar's strength, the currency remains popular with international reserves managers since the Aussie dollar has the highest interest rates of G-10 nations and on a steady upward trend against the U.S. greenback since June.

"In an environment where the G5 central banks are maintaining a trend of increasing accommodation and zero rates, yield flows (into the Australian dollar) will likely continue, not to mention triple A demand adding to the interest," Financial Times quoted UBS foreign currency analyst Geoffrey Yu.