An interest rate rise in Australia, a disputed British newspaper story and worries about ballooning U.S. debt combined Tuesday to hammer the dollar.
Investors moved out of dollars and into almost anything else. The greenback hit $1.47 against the euro, continuing a months-long slide, while gold closed at $1,038.60 an ounce, an all-time high.
The trigger for Tuesday’s action was the surprise rate increase by the Reserve Bank of Australia, the first G-20 central bank to tighten monetary policy. The RBA raised its benchmark lending rate a quarter of a percentage point to 3.25%.
“Economic conditions in Australia have been stronger than expected. … The risk of serious economic contraction … now (has) passed,” said Glenn Stevens, RBA governor.
In the depths of the financial crisis, the dollar rose, thanks to investors seeking safety and liquidity.
But since earlier this year, the U.S. currency has drooped amid concerns that inflation will erode its value. “Dollar weakness is just going to be a grind for the next couple of months,” said Marc Chandler, senior vice president at Brown Bros. Harriman.
A weaker dollar makes U.S. exports less expensive but also means higher prices for imports.
Markets also were unsettled by a report in The Independent newspaper, which said the Gulf Arab states, China, Russia, Japan and France had secretly agreed to abandon the dollar as the standard for oil trading.
Several of the countries denied such talks had been held. Saudi Central Bank Governor Muhammad al-Jasser called the report “absolutely incorrect.”
Analysts likewise were dismissive. “I don’t take the (story) from the Middle East all that seriously. It doesn’t make much sense for any of the Gulf states to abandon the dollar,” says Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington, D.C.
The U.S. Treasury declined to comment.
Gold bugs weren’t convinced. “There has been increasing talk for months and months about the role of the dollar as the world’s reserve currency,” said Caesar Bryan, manager of Gamco Gold fund. “The Russians have raised the issue, the Chinese have raised the issue, the OPEC countries have raised the issue.”
World Bank President Robert Zoellick drew notice last month when he said the euro and yuan one day could rival the dollar.
Chinese officials, who have much of their $2.1 trillion in reserves invested in U.S. Treasuries, have publicly fretted about seeing those investments decline. Still, for all the talk, the Chinese today hold more of their reserves in dollars than they did one year ago.