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Australia, NZ dlrs buckle as Fed caution boosts US$

By Wayne Cole

SYDNEY, Aug 1 (Reuters) – The Australian dollar gouged out a seven-month trough on Thursday after the U.S. Federal Reserve challenged market expectations for a lengthy round of rate cuts, sending the U.S. dollar surging across the board.

The Aussie was licking its wounds at $0.6851, having fallen from a top of $0.6899 overnight to hit a low of $0.6828. The retreat breached the June low of $0.6832 and took the Aussie back to levels seen just briefly during the flash crash of early January.

It also left the Aussie facing its tenth straight session of losses, the worst losing streak since 2010.

The kiwi fared little better, touching a six-week low of $0.6535 before steadying at $0.6557. Major support now lies at the May low of $0.6482.

The lunge lower came after the Fed cut rates a quarter point as expected but suggested a series of easings was unlikely, much to the chagrin of market doves.

Short-term Treasury yields rose in response, though it was notable that long-term yields actually declined as investors wagered the Fed was risking a sharper slowdown in the economy that would further suppress inflation.

Futures reined back the probability of another easing in September to only 40% and now imply three cuts spread out over the next 18 months or so.

The Fed’s limited plans contrasted with the outlook of Reserve Bank of Australia (RBA) Governor Philip Lowe who last week stated rates would stay low for an extended period, following cuts in both June and July.

“The USD should get a modest lift as short-term rates reprice and because the Fed’s implicit view on growth still speaks to some U.S. ‘exceptionalism’,” said Alan Ruskin, chief international strategist at Deutsche Bank.

“Slow “mid-cycle” Fed easing will leave U.S. rates ranked at the top of any G10 league table for short and long-term yields over the next year.”

Yet the Fed has also done the RBA a favour by indirectly lifting the U.S. dollar and depressing the Aussie, a long-desired shift that should support export earnings and imported inflation over time.

A softer currency combined with a hefty rise in iron ore prices has already been a boon to trade with data out Thursday showing prices for Australia’s exports jumped 3.8% in the second quarter, to be 17% higher for the year.

A sustained decline in the Aussie would thus lessen pressure on the RBA to cut rates even further, leading the market to pare back the probability of an easing in the next couple of months.

Futures now show almost no chance of a cut at its policy meeting next week and only 28% for September. October is seen as a 66% chance, rising to 96% by November.

Australian government bond futures also easing in price, with the three-year bond contract off 3 ticks at 99.190. (Editing by Simon Cameron-Moore)

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