NEWS / Foreign Exchange

The Australian dollar rose to a 11-year high against the U.S. dollar last night

The Australian dollar rose to a 11-year high against the U.S. dollar last night. The Reserve Bank of Australia has been indicating that it may need to tighten monetary policy further to contain inflationary pressures, and the recent rise in short-term interest rates has made Australian assets more attractive. (For example, 2-year government bond yields in Australia have risen nearly 30 basis points over the past two weeks while the comparable yield in the United States is up only 10 basis points over that period.) Speaking of inflationary pressures, U.K. consumer prices rose 0.4% in February, which lifted the year-over-year rate of CPI inflation to 2.8% from 2.7% in January. The higher-than-expected inflation outturn increases the probability that the Bank of England hikes rates again, which has helped to boost sterling this morning.

The National Association of Home Builders index declined a bit in March, suggesting that the U.S. housing market remains rather weak. Yesterday's release sets the stage for "hard" data on housing starts and permits in February, which are on the docket this morning at 8:30 EDT. Although seasonal patterns can make the series volatile on a monthly basis, the consensus forecast looks for a slight rebound in housing starts in February. Better-than-expected data could give the greenback a slight lift, while weaker-than-expected data likely will weigh on the dollar a bit. That said, we suspect that trading in currency markets will remain rather quiet until the conclusion of the FOMC meeting tomorrow afternoon. Although the Fed will surely keep rates on hold tomorrow, market participants are keenly interested in the statement that will be released at the conclusion of the meeting for any guidance the FOMC gives about the stance of monetary policy going forward.