Dollar hits 11-year high after China rate cut

02/03/2015 08:34 AST

The dollar hit an 11-year high against a basket of major currencies on Monday, with the greenback gaining a broad lift after an interest rate cut in China dented the Chinese yuan and emerging Asian currencies.

The dollar rose to as high as 95.505 .DXY against a basket of major currencies, its highest level since September 2003. The dollar index last traded at 95.417.

The Australian dollar gained only a fleeting boost after China cut rates on Saturday, in the latest effort to support the world's second-largest economy as its momentum slows and deflation risks rise.

After rallying to $0.7850 earlier on Monday, the Aussie dollar reversed course and slid 0.6 per cent to $0.7763, coming under pressure as mixed local economic data and concerns about China's slowing economy reinforced the case for more interest rate cuts in Australia.

The Reserve Bank of Australia (RBA) holds its March policy meeting on Tuesday and there is much speculation it could follow up a February easing with a cut to 2.0 per cent.

Analysts are split on whether the RBA will deliver a follow-up rate cut. Should it stand pat, traders said the Aussie could see a relief rally. A cut could send the Aussie lower. AURATE1

"Given the higher expectation this month that the RBA could ease, expect the downside reaction will be somewhat more limited, although the immediate support between 0.7740 and 0.7770 should, nevertheless, still be at risk," analysts at Macquarie Bank wrote in a note to clients.

"Technically, the more important support, and the one we need to break for bearish confirmation that the downtrend is continuing, is at 0.7620/0.7640."

Some analysts said the greenback's strength against the Chinese yuan and emerging Asian currencies in the wake of China's rate cut helped bolster the dollar versus major currencies as well.

"China's rate cut has triggered dollar-buying against the Chinese yuan and that is helping to spur broad buying of the dollar," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

Okagawa said such broad dollar buying on the back of China's rate cut was likely to prove short-lived, adding that the focus would probably shift soon to US jobs data due on Friday.

Emerging Asian currencies fell against the dollar as China's rate cut and its lower daily yuan guidance on Monday underscored expectations of further easing in the region to tackle slowing growth and deflationary pressures.

The euro eased 0.2 per cent to $1.1176 EUR=. It touched a fresh one-month low of $1.1160 earlier on Monday.

The key focus this week is the European Central Bank (ECB) meeting on Thursday. Investors are keenly waiting for further details on its 1 trillion euro ($1.1 trillion) government bond-buying program, which begins this month.

The ECB may also decide whether to accept Greek government bonds as collateral for its direct funding, which the bank stopped doing at the start of February.

Trade Arabia