The Australian dollar was more than one US cent higher this morning, after the US Federal Reserve said interest rates could stay at their record lows for the next two years due to weakness in the economy.
At 0700 AEST on Wednesday, the Australian dollar was trading at 103.53 US cents, up from 102.25 cents on Tuesday afternoon.
The local unit fell below parity on Tuesday, as markets continued to react to last week’s historic downgrade of the United States’ credit rating by Standard & Poor’s. Since 1700 AEST on Tuesday, the Australian dollar has traded between a low of 100.65 US cents and 103.79 US cents.
Overnight, the US Federal Reserve said it would likely keep interest rates at record lows for the next two years after acknowledging that the US economy is weaker than it had thought and faces increasing risks.
Interest rates have been at that record low since December 2008.
The Fed had previously said only that it would keep it low for “an extended period”.
Westpac New Zealand senior market strategist Imre Speizer said the news weakened the US dollar and stimulated risk appetite, which had helped to push the Australian dollar higher.
“Immediately upon the announcement, there were knee-jerk reactions wildly in both directions but the settled view is that by holding interest rates near zero for the next two years, it adds certainty and stimulus to the economy,” Mr Speizer said.
“It should be positive for equities, a positive for risk appetite and it’s a positive for the Aussie.
“At the same time, by lowering market interest rates slightly … it has a slight negative effect on the US dollar.”
Locally on Wednesday, Westpac and the Melbourne Institute are due to release their Leading Indexes of Economic Activity for August, while the Australian Bureau of Statistics releases lending finance data for June.
Mr Speizer said he didn’t expect the data to have a big influence on the Australian dollar adding that sentiment could be set by the mood on the equity market.
The Australian dollar hit a peak of 110.81 US cents on July 27, its highest level since the fixed exchange rate era ended with its float in December 1983.