Australian dollar suffers as stocks drop

The Australian dollar was in a subdued mood on Tuesday as stocks fell again and dovish comments from the country's central bank

merely reinforced expectations of further sharp cuts in interest rates here.

The local currency was also undermined by a slide in U.S. stocks, which rippled through Asian markets to the benefit of perceived safe havens like the yen and U.S. dollars.

That left the Aussie hovering at $0.6467, off Monday's high of $0.6597 but at least above the recent trough of $0.6363.

It was not helped by minutes of the Reserve Bank of Australia's (RBA) November meeting that showed escalating concern about the impact that global gloom and the loss of household wealth were having on business and consumer confidence.

Indeed, the economic outlook dimmed so rapidly at the start of November that the board chose to cut by 75 basis points to 5.25 percent, when the initial recommendation just a few days earlier was for a 50 basis-point move.

'The conclusion is clearly that further easing of policy can be expected over coming months to take policy to accommodative settings,' said ANZ senior currency strategist Tony Morriss.

The market is pricing in a cut of at least 75 basis points at the RBA's December policy meeting and a further easing to around 3.5 percent by March.

Morriss noted that with so much easing already priced in, an actual cut in December might not be so negative for the Aussie, especially if it was seen supporting economic growth.

However, the weakness of the global economy, and lately China, meant commodity prices could fall yet further, with grim repercussions for a resource exporter like Australia.

'We now see the Aussie staying weaker for longer in light of the global slowdown,' said Morriss. He predicted a drop below 60 cents in 2009 and even a move toward 54 by year-end.

The November minutes also suggested the RBA would not try and stand in the way of further falls. The central bank made the point that its intervention of recent weeks was not intended to defend any particular level of the Aussie but rather to provide liquidity in disorderly markets.

That left the local currency looking defenceless against the Japanese yen which is benefiting greatly from being considered a safe haven in times of financial strain. The Aussie had lapsed to 62.47 yen in late trade, from a 64.11 peak on Monday.

The same focus on safety boosted bonds at first, with short-term futures reaching record highs, but profit-taking set in as the day wore on.

Three-year bond futures eased back 0.075 points to 96.14, after touching a fresh all-time peak of 96.305, while the 10-year contract fell 0.025 points to 95.00.