Australian dollar extends decline on Fed tapering

PUBLISHED : Tuesday, 31 December, 2013, 1:36am
UPDATED : Tuesday, 31 December, 2013, 4:12am

The Australian dollar headed for its biggest yearly decline since 2008 as signs of improvement in the economy in the United States boosted expectations that the Federal Reserve will continue to scale back stimulus that has debased the US dollar.

The Australian currency weakened, extending the worst weekly run of losses in more than three decades before data that may show expansion in Chinese manufacturing slowed. Iron-ore ports on Australia's northwest coast began shutting down over the weekend as Tropical Cyclone Christine nears. The New Zealand dollar held a five-day decline against the greenback.

"The big theme has been Fed tapering," said Janu Chan, economist at St George Bank. "With that set to continue into 2014, we'll expect the aussie to come under some further pressure over the next year."

The Australian dollar weakened 0.1 per cent to 88.57 US cents in Sydney morning trade from Friday, when it capped a 10th consecutive weekly decline, the longest losing streak since exchange controls were scrapped in 1983. The currency has fallen 15 per cent this year, the sharpest drop since 2008.

The kiwi bought 81.48 US cents from 81.5 at the end of last week, down 0.6 per cent since December 20. It has lost 1.7 per cent this year.

Australia's 10-year government bond yield rose as much as four basis points to 4.32 per cent.

Port Hedland, the largest iron-ore export terminal, shut down on Sunday morning as the cyclone nears the Pilbara coast. The port of Dampier closed on Sunday evening, acting chief executive Paul Toussaint-Jackson said.

"It's still early days in determining what kind of damage the cyclone would have on iron-ore production," said Chan. "The bigger picture is that, because of the investments over the past decade or so, production capacity has increased greatly, so over the next year we should still continue to see the trend improving as long as Chinese demand is maintained."

China's purchasing managers' index probably fell to 51.2 this month from 51.4 in November, according to the median estimate of economists surveyed. Numbers above 50 signal expansion. China is the biggest trading partner for both Australia and New Zealand.

In the US, pending home sales increased 1 per cent in November from the previous month, economists in a separate poll forecast.

The Fed said on December 18 that it would reduce monthly asset purchases in January to US$75 billion from US$85 billion. Policymakers would cut bond purchases in US$10 billion increments over the next seven meetings before ending the programme in December 2014, economists said.