The Australian dollar fell to its lowest in two weeks against the yen and the U.S. dollar on Tuesday while bonds surged as a flight to safety gathered pace after U.S. lawmakers rejected a $700 billion bailout package.

The shock rejection of the bailout package, aimed at stabilising the battered U.S. financial sector, triggered a major sell-off on Wall Street and regional stock markets. As a result, investors unwound risky leveraged positions in high-yield currencies.

“Most markets are transfixed by what is happening in the U.S.,” said Joseph Capurso, currency strategist at Commonwealth Bank.

“We expect risk aversion and volatility to rule unless some solution emerges from the U.S. on the bailout package. That is not a great position to be in for the Aussie.”

The Aussie fell to a two-week low against the yen, dropping to 82.12 yen from 87.70 yen late here on Monday, before recovering to 83.62 yen on hopes U.S. lawmakers would still pass a bailout package soon.

Against the U.S. currency, the Aussie fell to $0.8013 by late from $0.8250 on Monday, but was off a low of $0.7935, helped in part by better-than-expected domestic retail sales data.

The solid 0.3 percent rise in August retail sales did little to shift expectations of an aggressive 50 basis point rate cut by the Reserve Bank of Australia (RBA) next month to ease some of the pain being caused by the global credit crisis.

“Today’s batch of data releases was for August; since then the downside risks to the world economy and local economy have risen significantly,” said Besa Deda, senior currency strategist at St George.

“Financial conditions have tightened further as the credit crisis digs its claws deeper. So increasingly it looks like the RBA may need to deliver a 50 basis point rate cut next week to help mitigate the downside risks to the Australian economy.”

Australian bond futures surged as investors scrambled for safe-haven investments and priced in coordinated rate cuts by global central banks.

“Indeed, the case for large synchronised global rate cuts is stronger than ever before and little else seems available at present to slow the adverse feedback loop threatening to stall the global economy, or worse,” said Rory Robertson, interest rate strategist at Macquarie.

Three-year Australian bond futures jumped 0.23 points to 94.925, while the 10-year bond contract added 0.245 points to 94.60.

Bill futures also rallied as investors were convinced the RBA would have to cut rates when it meets next week to counter the tightening in the interbank market.

The RBA injected cash again into the money market on Tuesday, just a day after the Federal Reserve announced a $330 billion expansion in its liquidity injection arrangement with other major central banks across the world, to help ease the credit squeeze in interbank money markets.

—————-(Snapshot at 4:15p.m./0615GMT)——————

FUTURES CASH YIELD

90-DAY BILL (DEC) 93.62 (+0.230) 7.32 (7.32)

3-YR BOND (DEC) 94.925(+0.230) 5.10 (5.35)

10-YR BOND (DEC) 94.600(+0.245) 5.41 (5.67)

AUD/USD 0.8013 (0.8250) US 10-YR 3.66 (3.83)

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

USD +332 (+332) +175 (+184) *FUTURES +0.325 (+0.330)

CAD +248 (+258) +188 (+199) *AUD 2-YR/10-YR SPREAD

NZD -44 (-28) -29 ( -06) *CASH +30 ( +30)

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Source: http://www.afxnews.com

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