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Aussie Fell as Commodity Prices Slide

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Core prompt: The Aussie fell after the central bank left the door open for more interest rate cuts and forecast the currency might fall further as commodity prices slide. The

The Aussie fell after the central bank left the door open for more interest rate cuts and forecast the currency might fall further as commodity prices slide.

The minutes of the Reserve Bank of Australia's policy meeting on June 4 showed the bank was open to lowering its benchmark cash-rate target further should the waning of a decade-long mining boom place too much strain on the rest of Australia's economy.

"The board also judged that the inflation outlook as currently assessed might provide some scope for further easing, should that be required to support demand," the minutes said.

Late in Asia trading, the dollar was changing hands at US95.1c, down from US96.5c yesterday.

The RBA continued its recent habit of commenting on the dollar, saying that it still remains high relative to export prices despite falling in the last month.

With the mining investment boom fading and non-mining parts of the economy remaining subdued, further falls in the local dollar would help the economy, it said.

"It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which should help to foster a rebalancing of growth in the economy," the RBA said.

"Markets appear to be interpreting this as indication that the RBA would like to see Australian dollar lower," Citigroup strategist Todd Elmer said.

The dollar has fallen about 10 per cent since the start of May as traders anticipated further rate cuts and on speculation the US Federal Reserve was closer to scaling back its bond-buying program that has propped up equity markets worldwide.

Currency traders were also awaiting the International Monetary Fund to release data on the level of central bank holdings of the Aussie.

The dollar and government bonds have attracted the attention of central banks globally in recent years thanks to the country's AAA sovereign rating.

The decision by foreign reserve managers to diversify into the dollar is often cited as one of the key reasons why the currency traded near 30-year highs recently.

The IMF data should provide reassurance about the low potential for capital flight from Australia, UBS currency strategist Gareth Berry said.

With 70 per cent of Australian bonds held overseas, capital flight would normally be a concern, but central banks are not skittish investors, he said. "Their investment horizons are measured in years, not days. That means the traditional image of a foreign investor who tends to flee at the first sign of trouble does not apply in this case."

 
keywords: Dollar, Rate Cuts
 
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