Aussie Dollar Advances as Stimulus Bets Boost Risk Demand

The Australian dollar touched the highest in almost three weeks as demand for riskier assets rose amid speculation the U.S. and China will take more steps to stimulate the world’s largest economies.

The so-called Aussie and New Zealand’s dollar strengthened against most of their major counterparts before the Federal Reserve opens a two-day policy meeting today, while Germany’s constitutional court is set to decide on the country’s participation in Europe’s bailout fund. Demand for Australia’s currency was also supported after a private report today showed an improvement in Australian consumer confidence.

“If the Fed decides to conduct QE3 as the markets expect, it’s likely to lead to a risk-on sentiment,” Junichi Ishikawa, a Tokyo-based analyst at IG Markets Securities Ltd. said, referring to a third round of asset purchases known as quantitative easing. “The Aussie and kiwi are supported on the back of the U.S. dollar’s broad weakness.”

The Australian dollar gained 0.4 percent to $1.0475 as of 4:13 p.m. in Sydney after earlier touching $1.0489, the strongest level since Aug. 23. It rose 0.6 percent to 81.60 yen. New Zealand’s dollar, known as the kiwi, added 0.3 percent to 82 U.S. cents, after touching 82.12, the highest since Aug. 7. It climbed 0.5 percent to 63.88 yen.

Australian government bonds declined, with the yield on 10-year notes rising five basis points, or 0.05 percentage point, to 3.17 percent.

The MSCI Asia Pacific Index of stocks gained 1.2 percent following a 0.4 percent advance in the MSCI World Index yesterday.

Consumer Confidence

A report released by Westpac Banking Corp. and the Melbourne Institute showed Australia’s consumer confidence improved this month. The sentiment index rose 1.6 percent to 98.2, though the fact that the gauge held below 100 indicates that pessimists continued to outnumber optimists.

Fed policy makers are due to begin a two-day meeting to discuss possible measures to stimulate the economy, including asset purchases that tend to debase the U.S. currency. Fed Chairman Ben S. Bernanke said on Aug. 31 that the costs of “nontraditional policies” appeared manageable when considered carefully. He said he wouldn’t rule out steps to lower a jobless rate he described as a “grave concern.”

China has “ample” room to use fiscal and monetary policy to boost economic growth, Chinese Premier Wen Jiabao said yesterday.

Biggest Risk

“China’s slowdown is the biggest downside risk for the Aussie,” said IG’s Ishikawa. “The currency is likely to be well supported in the long term, however, should we get more stimulus measures from global central banks.”

The Australian dollar dropped 3.2 percent in the past month, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as concern over China’s weaker growth dimmed the outlook for the South Pacific nation’s commodity exports.

Germany’s Federal Constitutional Court is due to rule on whether the country can ratify the European Stability Mechanism, a 500 billion-euro ($643 billion) fund established to combat the region’s debt crisis. Failure to approve the ESM would throw Europe’s bailout measures into doubt.

-- Editors: Jonathan Annells, Benjamin Purvis

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