The Australian dollar fell toward seven-month lows on Tuesday, dragged down by a fresh bout of risk aversion and after minutes from the central bank’s latest board meeting reaffirmed expectations of an easing bias.

The Aussie was also dogged by worries about a global economic slowdown and its adverse impact on demand for commodities, of which Australia is a big exporter. Those worries led investors to unwind long commodity and short U.S. dollar positions, helping the U.S. currency to multi-month highs.

In late trade, the Australian dollar <AUD=> was at $0.8652/53, down from $0.8733/34 late here on Monday and not far from seven-month lows at $0.8590 struck last Wednesday.

Minutes of the Reserve Bank of Australia’s (RBA) Aug. 5 policy meeting showed the board saw a case for an early easing in monetary policy given an unwarranted tightening in financial market conditions, slowing demand and a bleak global outlook. [nSYD127105]

The Aussie initially bounced on the minutes as they did not seem to support speculation about a hefty 50 basis-point cut in the current 7.25 percent cash rate when the board meets again on Sept. 2.

But analysts still saw a sizable easing in coming months.

“We remain concerned about the possibility of additional weakness in the economy given the continuing global credit crisis and restrictive monetary policy settings,” said Joshua Williamson, senior strategist at TD Securities.

“More interest rate cuts will be required to stabilise sentiment and activity, so we continue to look for a further 25 to 50 basis points of easing in addition to the September cut before the end of the year,” he added.

The Aussie has shed nearly 13 percent since it struck a 25-year high of $0.9851 in July, amid a sharp rally in the U.S. currency, declining commodity prices and expectations of domestic rate cuts in coming months.

Futures <CSRBA=CSAU> are pricing in at least a 25 basis point cut in the key cash rate, currently at a 12-year of 7.25 percent.

For graphics on the Aussie dollar and rate futures, click on https://customers.reuters.com/d/graphics/AU_DLR808.gif

A cut next month, the first in seven years, would diminish the Aussie’s high yield allure and could lead investors hunting for higher returns to pare their holdings.

Also, renewed risk aversion was likely to keep investors wary of high-yielding currencies.

Stocks, especially financial sector shares, fell on Tuesday on speculation that the U.S. Treasury might have to bail out home finance giants Fannie Mae <FNM.N> and Freddie Mac <FRE.N>. The Treasury Department said it had no plans to use its authority to backstop either of the two companies.

The Aussie fell to 95.26 yen <AUDJPY=R> from 96.19 yen late here on Monday, undermined by a loss in appetite for riskier assets and leveraged carry trades.

Australian bonds were mixed as investors trimmed chances of an aggressive rate cut by the RBA, balancing support from weakness in stocks. Three-year bond futures <YTTc1> were flat at 94.325, while the 10-year bond contract <YTCc1> shed 0.010 points to 94.215.

—————–(Snapshot at 4:10 p.m./0610 MT)—————

FUTURES CASH YIELD

90-DAY BILL<YBAc1> (SEP) 92.760(-0.02) <AU3MBB=RR> 7.28 (7.29)

3-YR BOND <YTTc1> (SEP) 94.325( 0.000) <AU3YT=RR> 5.67 (5.67)

10-YR BOND <YTCc1> (SEP) 94.215(-0.010) <AU10YT=RR> 5.83 (5.83)

AUD/USD <AUD=> 0.8652 (0.8733) US 10-YR <US10YT=RR> 3.81 (3.85)

—————————————————————-

AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD

USD +344 (+337) +202 (+197) *FUTURES +0.110 (+0.105)

CAD +303 (+301) +230 (+226) *AUD 2-YR/10-YR SPREAD

NZD 3YR -52 (-52) -38 ( -39) *CASH +06 ( +06)

—————————————————————-

Source: http://www.afxnews.com

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