Relief over the likely successful conclusion to the U.S. debt-debacle seems to have been confined to an end-of-day rally on Wall Street on a day marred by a further convincing sign that the economy remains dogged by lackluster growth. So entrenched is this current bout of weakness that the Australian central bank appears to have put global growth concerns ahead of medium-term worries over inflation causing an evaporation of fears that interest rates in the nation will rise. Those same concerns once again caught the glare of fearful investors in Euroland as dealers considered the impact of a lack of growth on still worrisome budget deficits.
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Aussie dollar – The Reserve Bank of Australia maintained its 4.75% benchmark short-term rate of interest on Tuesday going to great pains to highlight the slowing pace of global growth. While it said it remained concerned by the outlook about inflation over the medium-term it kept rates unchanged for an eighth-straight meeting because it argued that it made sense under such conditions “for monetary policy to exert a degree of restraint.” The Aussie slid in response as interest rate expectations turned to dust. There was a massive move in short-term yield expectations as a result while both two and 10-year government bonds surged. For the first time in two-and-a-half years, the cash yield on the 10-year bond closed below the Bank’s short-term lending rate indicative of exactly how resolute the money market is about no further tightening in policy this year. The Aussie slid 1.1% and buys $1.0846 U.S. cents.
Japanese yen – The Nikkei newspaper carried a story that provoked a government response to the suggestion it was on the cusp of intervening to restrain the Japanese yen. The Nikkei said that at this week’s two-day Bank of Japan meeting central bankers would mull measures to further ease monetary policy and said the Bank was ready to sell the yen. However, an unnamed official told reporters that the government had not yet decided on specifics to conduct its foreign-exchange policy while it remained in regular contact with overseas sources. Japanese stocks fell overnight with no let-up in sight for the health of exporters’ earnings as economists mull the impact of U.S. spending cuts on the global economy. The yen is, however, lower versus the dollar on the persistent threat of intervention and last traded at ¥77.33. The yen rose against the euro to ¥109.64.
U.S. Dollar – The dollar rose after congressional leaders agreed to raise the debt-ceiling and ahead of a Senate vote later on Tuesday. With several recent signs of weakness in growth within the world’s largest economy, investors are now more nervous over the slowdown with $2.4 trillion in spending cuts likely over the next decade. The dollar index rose as equity index futures slumped following stocks in Asia and Europe lower. The index rose by 0.5% to 74.65 ahead of personal income data with auto sales reports due later in the morning.