Australian Dollar Fell Sharply After Warning on Outlook for Australian Economy Issued

The Australian dollar fell sharply after The Wall Street Journal reported a warning on the outlook for the Australian economy issued by ratings firm Standard and Poor's.

At 5pm AEDT the dollar was buying $US1.04, down from $US1.0470 in late trading yesterday. It touched an intraday low of $US1.0378 following the report.

S&P highlighted risks to growth in the Australian economy should mining investment slow sharply.

Terry Chan, a credit analyst at S&P, said most at risk from a "investment overhang" are commodity-exporting nations including Australia, which faces an "intermediate" risk of a deep slowdown - one notch below the highest warning.

"We believe the level of a country's investment overhang can be a leading indicator of a potential economic correction," he said.

After a long period of stellar growth, mining investment in Australia is expected to taper off in the second half of 2013, posing a threat to economic growth.

The Reserve Bank of Australia has cut interest rates sharply over the last year in a bid to spark dormant parts of the economy like housing construction and retail sales.

However, despite interest rate cuts totalling 1.75 percentage points since November 2011, there have been few signs of life in these key areas of the economy, which employ substantial numbers of people.

The S&P report helped draw the focus to the RBA policy meeting next Tuesday, its first for the year.

Economists aren't expecting an imminent cut in interest rates, but also don't rule out further cuts later in the year. Official interest rates now stand at 3 per cent, just above record lows set in the early 1960s.

In a survey of 18 economists by the Wall Street Journal, 13 expect no cut in interest rates next week.

Encouraging economic indicators had emerged earlier today with new home sales rising in December, during a period when property markets are normally quiet. Credit growth also showed a small rise in December.

New home sales rose 6.2 per cent in the month, capping off a 3.3 per cent rise in the fourth quarter from the previous three months, data published by the Housing Industry Association, or HIA, showed.

Sue Trinh, currency strategist at RBC Capital Markets in Hong Kong said the data raised hopes that interest rate cuts are starting to gain "traction."

"This year should be a good year for the Australian housing market," said Paul Bloxham, chief economist at HSBC Australia. "Today's new home sales data supports our view that the housing construction cycle has turned."

Mr Bloxham is expecting solid house price growth in Australia in 2013, snapping two years of declining prices. He expects the median house price across the country to rise 6 per cent from 2012 levels.