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Dollar recovers from 42 month low

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The Australian dollar is higher as a rally in the US dollar loses steam.

Early Monday, the Australian currency was trading at 89.26 US cents, up from 88.74 cents on Friday.

The Australian dollar hit a three-and-a-half-year low of 88.21 US cents last week as the US dollar rallied against all the major currencies after the US Federal Reserve said it would reduce its economic stimulus measures from January.

BK Asset Management managing director Kathy Lien said that rally ended during the US trading session on Friday.

“The reversal in the greenback can be tied directly to the reversal in US bond yields,” she said.

At the beginning of the US session, 10 year Treasury yields were approaching three per cent but by the end the day, it dropped below 2.9 per cent.

“Outside of buyers swooping into bonds at key levels, there was no fundamental data to support the move.

“In fact, today’s economic reports should have driven the dollar higher as equity investors certainly cheered the upward revision in gross domestic product.”

On Friday night, Australian time, the US Commerce Department reported that the US economy grew at a robust 4.1 per cent annual rate in the third quarter, much faster than was previously estimated.

Lien said there may be some downward pressure for the Australian dollar because borrowing costs in China have risen significantly.

“The seven day repo rate has doubled over the past five days, making it incredibly expensive for banks to borrow,” she said.

“A similar situation happened back in June and at the time, Asian equities and the Australian dollar were hit hard by tighter monetary conditions in China.

“So far external markets have taken the developments in stride, but the two per cent slide in the Shanghai stocks could spillover to other markets.”

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