NEW YORK (Reuters) - The Australian dollar fell sharply on Wednesday after the country’s central bank opened the door to a possible rate cut as it acknowledged growing economic risks, while the U.S. dollar logged a fifth straight session of gains against a basket of major currencies.
In a shift from the Reserve Bank of Australia’s long-standing tightening bias, Governor Philip Lowe said interest rates could move in either direction, depending on the strength of the labor market and inflation.
“The Aussie is definitely where the action is today,” said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California. “The language was a bit more dovish than expected.”
The policy shift caught some investors off-guard because a day earlier the Reserve Bank of Australia steered clear of an easing signal as it held its official cash rate at a record low 1.50 percent.
The Aussie was 1.67 percent lower at $0.71, on pace for its worst one-day decline since June 27, 2016.
The selloff weighed on the New Zealand dollar and the Canadian dollar, with both logging declines against their U.S. counterpart.
Lowe’s speech highlighted a difficult balancing act facing policymakers as they try to manage market expectations and ease pressure on growth.
Both the U.S. Federal Reserve and the European Central Bank have signaled cautious monetary outlooks in recent days. The Fed’s pause proved a relatively bigger surprise for markets.
“A year and a half ago a lot of the chatter was about central bank tightening,” Trang said. “That narrative has changed to, not so much easy monetary policy, but certainly not as tight, in terms of where interest rates lie.”
More broadly, the dollar index, which tracks the greenback versus the euro, yen, British pound and three other currencies, was up 0.34 percent at 96.391.
The greenback was supported by data that showed the U.S. trade deficit fell in November for the first time in six months.
“While the greenback has fared better of late, headwinds could resume if the economy starts to show signs of succumbing to the global slowdown,” Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, said in a note.
Traders were focused on the near-term outlook for monetary policy as well as any sign of progress in trade negotiations between Washington and Beijing as a March 2 deadline for an increase in U.S. tariffs on Chinese goods nears. U.S. Treasury Secretary Steven Mnuchin said on Wednesday that he and other U.S. officials will travel to Beijing next week for trade talks.
Sterling was steady on Wednesday as Prime Minister Theresa May tried to persuade the European Union to modify her Brexit deal to avoid a disorderly British departure from the bloc.
Reporting by Saqib Iqbal Ahmed; Editing by Susan Thomas and Leslie Adler