Last updated: August 23, 2010 11:18 pm

Aussie dollar recovers as euro falters

The Australian dollar recovered from early losses on Monday as traders shrugged off news that neither of Australia’s leading parties won an overall majority in the weekend’s general election.

The Aussie dollar initially dropped to a one-month low of $0.8833 against the US dollar but steadied as investors digested the implications of the political deadlock in Canberra.

Adam Cole, of RBC Capital Markets, said he found it difficult to believe politics would be a serious issue for the Australian dollar.

He said in recent months there had been a clear political risk premium in other currencies, but this had reflected the combination of political uncertainty and a need for aggressive fiscal consolidation.

“The UK, in particular, fulfilled these criteria ahead of the May general election,” said Mr Cole. “With a sound fiscal position, both in terms of debt and the current deficit, Australia seems far closer to the Canadian model, whereby political uncertainty counts for very little in currency markets.”

Late in New York, the Australian dollar had recovered to stand flat at $0.8936 against the US dollar.

Meanwhile, the euro continued to come under pressure, hitting a five-week low against the dollar and a two-month trough against sterling following dovish comments from Axel Weber, German Bundesbank president and a member of the European Central Bank’s governing council, last week.

Mr Weber pushed for a later end to the ECB’s bank liquidity assistance than expected.

Analysts said the comments were significant given that Mr Weber was the favourite to take over as president of the ECB from incumbent Jean-Claude Trichet and had been regarded as one of the most hawkish of ECB board members.

Ulrich Leuchtmann, of Commerzbank, said the comments shattered the illusion that the ECB would exit from its ultra-loose monetary policy stance any time soon and that concerns over eurozone sovereign debt remained high. “So far, surprisingly positive eurozone economic data has distracted from the situation in Europe,” Mr Leuchtmann said. “But it has become clear that the difficulties caused by the debt crisis are far from over.”

The euro fell 0.3 per cent to $1.2680 against the dollar, lost 0.3 per cent to £0.8162 against the pound and dropped 0.7 per cent to Y108.10 against the yen.

The yen also rose 0.4 per cent to Y85.27 against the dollar, staying close to the 15-year high of Y84.72 hit earlier this month.

The dollar was flat at $1.5537 against the pound and climbed 0.6 per cent to SFr1.0398 against the Swiss franc.

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