* Dollar index edges up to fresh 5-week high
* Lower volume on US holiday could lead to volatility
* Expectations of Fed's reduction of stimulus support dollar
By Lisa Twaronite
TOKYO, July 3 The Australian dollar's tentative
recovery unraveled on Wednesday as it skidded to fresh 3-year
lows after the head of the country's central bank said it stands
ready to support an economy shifting to a new source of growth
as its long-run mining investment boom cools.
The U.S. dollar held firm against its major counterparts,
with the dollar index touching its highest level since late May,
as investors positioned for a U.S. holiday and key jobs data
that could heighten expectations that the Federal Reserve will
begin to reduce its monetary stimulus in the coming months.
Speaking just a day after the Reserve Bank of Australia
(RBA) left its cash rate unchanged at a record low 2.75 percent,
Governor Glenn Stevens said he was surprised by the resilience
of the Australian dollar, but noted that free-floating exchange
rates "do eventually adjust."
Stevens' comments sent the Aussie plunging as low as $0.9081
, from a session high of $0.9189. It was last down 0.6
percent at $0.9087.
"The RBA always says the Australian dollar is still high.
It's true, I think," said Masashi Murata, senior currency
strategist at Brown Brothers Harriman in Tokyo.
"Probably the $0.9000 level is not so strange, considering
Australian fundamentals of weaker investment in natural resource
industries, weak retail sales, weak Chinese growth. It's very
hard to find good points to boost the Aussie dollar right now,"
Growth in China's services sector sagged to its weakest pace
in nine months in June, according to data released on Wednesday.
The Aussie has come under heavy selling pressure in recent
weeks as the U.S. dollar rose broadly on expectations the Fed
would soon start to unwind its stimulus, and on slowing growth
in China, Australia's major export market. The RBA's dovish
comments amplified the currency's fall from levels of over $1.00
as recently as May 14.
U.S. financial markets will shut early on Wednesday and
remain closed on Thursday in observance of the U.S. Independence
Day holiday. Lower volume could lead to greater volatility,
particularly ahead of Friday's release of the monthly jobs
report for June.
Economists polled by Reuters expect payroll additions of
165,000 last month and a lower unemployment rate of 7.5 percent.
The Fed has signaled its intent to begin to consider
trimming its bond-buying stimulus as the U.S. economy improves.
Such expectations have pushed up U.S. Treasury yields, which in
turn have lifted the greenback.
A better-than-expected figure would likely push up both U.S.
yields and the dollar. A disappointing figure would suggest the
central bank will maintain its asset purchases for now, though
some strategists and market participants believe it would not
alter the overall trend toward a stronger dollar.
"Most believe that the Fed is mostly likely to taper at some
point in 2013, so it's kind of like 'heads I win, tails you
lose,'" said Andrew Wilkinson, chief economic strategist at
Miller Tabak in New York.
"You buy the dollar on expectations of strong data, and even
if it's softer, there shouldn't be a resumption of strength in
the yen," he said, with the Bank of Japan committed to
maintaining its dramatic monetary easing to aim for its target
of two percent inflation in two years.
Data on Tuesday backed stimulus-tapering expectations, as
U.S. new motor vehicle sales in June were on track for their
strongest month in more than 5-1/2 years, while factories posted
a second straight month of gains in new orders in May. Home
prices also posted their biggest annual increase in more than
The dollar index added 0.1 percent to 83.616 after
earlier rising as high as 83.635, its highest since May 30.
The dollar climbed slightly from late U.S. trade to 100.65
yen after advancing to 100.86 yen early in the session,
its loftiest level since May 31. On that day, it rose as high as
101.27 yen, with the 101-yen level now seen as a key resistance
point and stop-loss orders said to lie around it.
The euro slipped about 0.1 percent to $1.2964. The
European Central Bank is likely to emphasise at its monthly
meeting on Thursday that the euro zone economy still needs help.