Return of AUD to Near Parity Cuts Prospect for Interest Rate Reduction

The Australian dollar continued to gain near parity with the U.S. currency amid the eurozone currency problems.

The AUD traded at 99.71 U.S. cents at 12:12 p.m. in Sydney, after it rose above $1 from 98.88 cents in New York trading on Monday, Bloomberg reports.

The strong Australian currency, however, is seen as a negative development for export firms and cuts prospects for an interest rate reduction, according to CMC Markets chief market analyst Ric Spooner.

Economists, though, are growing more confident that the Reserve Bank of Australia (RBA) will cut interest rates on Melbourne Cup Day to prevent the economy from stalling and joblessness from increasing.

The Australia and New Zealand Banking Group (ANZ) forecast on Tuesday that the key lending rate will be reduced by 25 basis points to 4.5 per cent at the RBA's November meeting in three weeks. ANZ issued the outlook after the RNA hinted of an interest rate reduction and reports on Monday that job position vacancies dipped 2.1 percent.

"There is a scope for the RBA to reduce interest rates a little as insurance against weaker than expected growth and even higher unemployment... This would be a prudent move given global uncertainties and downward revisions to global growth forecasts," The Australian quoted ANZ head of Australian economics Ivan Colhoun.

He said the rate cut would help protect the Australian economy against the slower global growth due to the European debt crisis.

CMC Markets senior FX dealer Tim Waterer pointed out that the market reaction to threat that the eurozone may disappear from the map helped strengthen the Australian dollar against the greenback.

"The currency encountered some resistance on the top side of the U.S.$1.00 mark, but it is well poised to move back to 1.01 - 1.02 should the equity rally show some signs of longevity. Particularly now that commodity prices like gold and copper are performing well again," Mr Waterer wrote in his market commentary.

Rochford Capital Director Derek Mumford forecast that the Aussie and Kiwi currencies would move higher in the near term, along with a corresponding rise in equity markets and risk appetite in general.

"A strong number in the Australian jobs report could be a boost for the Aussie in the near term because of its implications for interest rates," Bloomberg quoted Mr Mumford.

Economists surveyed by Bloomberg forecast that the Australian Bureau of Statistic's job reports slated for release on Thursday will show 10,000 jobs were added in September after 9,700 positions were cut in August.