The Australian dollar extended its gains against the US dollar in early trading on Thursday, currently hovering around the key $0.80 level. The so-called ‘commodity currency’ has been lifted by rising iron ore prices, as demand from China increased.
The Aussie has also benefited from hopes of a faster than expected recovery from the pandemic. The rollout of the COVID-19 vaccine and Australia’s falling unemployment rate have brightened the economic outlook.
Early this month, the Reserve Bank of Australia (RBA) kept interest rates at near-zero and said it would increase its bond buying program. Governor Philip Low stated: “The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off.”
On Wednesday, the US dollar fell to new three-year lows against commodity-linked currencies such as the Canadian, Australian and New Zealand dollars. The move came after a dovish testimony from Federal Reserve Chair Jerome Powell.
Powell stated that the Fed is “committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.” He confirmed that it will be “some time” before the Fed considers changing course.
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The commitment to low interest rates and bond buying from the Fed have supported expectations of an increase in global economic activity and inflation. Commodities prices typically rise when inflation is accelerating. In this way they offer a hedge against inflation. Risk sensitive, commodity currencies such as the Australian dollar were lifted by the anticipation of global economic growth and rising inflation.
Meanwhile, copper continued its winning streak on Wednesday, reaching its highest levels in almost a decade. The industrial metal has more than doubled in price since last March. Australia is the world’s 6th largest copper producer.
By Dan Blystone, TradersLog.com
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