THE Australian dollar hovered near three-month highs yesterday,buoyed by the US Federal Reserve's latest attempt to pump liquidity into the world's largest economy.
The Fed,at the conclusion of its last policy meeting for the year,decided to convert its expiring"Operation Twist"program--which aimed to lower long-term interest rates--into more outright asset purchases,increasing the amount of money the Fed will pump into the economy each month to$US85 billion($80.6bn).
The new plan would expand the size of the Fed's portfolio of assets,which last week reached$US2.861 trillion.Commonwealth Bank analyst Richard Grace said that equated to pumping about 6.5 per cent of the US's gross domestic product into the economy next year.
Reserve Bank governor Glenn Stevens this week warned that the trillions of dollars that governments worldwide had pumped into government bonds,mortgages and business loans since 2007 were fuelling inflation and sending capital flows towards countries where yields were higher.
At 5pm AEDT,the dollar was trading at$US1.0552,up US0.2c.The dollar also hit a nine-month high against the Japanese yen at Y=88.315 due to expectations the new government,which will be elected over the weekend,may take a more aggressive approach to stimulating the economy.CBA's Mr Grace said the Aussie dollar would continue facing upward pressure against the greenback as dollar movements looked set to become more volatile following the Fed's latest decision to yoke policy changes to economic indicators.
The Fed said it would hold benchmark interest rates near zero until unemployment fell below 6.5 per cent and inflation expectations rose above 2.5 per cent,replacing previous guidance based on the amount of time it would leave rates unchanged with the more explicit targets.
"There's less certainty as to whether the Fed will lift interest rates in 2015,which was its previous guidance,"Mr Grace said.
"That's offsetting some of the work the(RBA)has been doing to lower the Australian dollar."
