Strong hints by the US Federal Reserve that interest rates will rise at a faster pace in 2017 have sent the greenback flying against most major currencies but analysts doubt the Australian dollar will slide much further.
The Aussie dollar plunged 1.4 per cent to below US74¢ in the aftermath of the Fed's decision to lift rates for only the second time in 10 years but the currency's slide was stopped by surprisingly strong local employment data that showed the economy created 39,100 new jobs in November. In late trade, the currency was fetching US74.3¢.
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US Federal Reserve hikes interest rates
Federal Reserve Chief Janet Yellen announces the Fed has raised interest rates for only the second time in a decade, in response to a solid US economy and expectations of higher inflation.
"Every analyst was picking that the Fed would hike, so that was absolutely no surprise, but what was a little bit more illuminating was the change in their forecast for the Fed funds rate in 2017," said NAB senior economist David de Garis.
More Fed hikes likely
Forecasts by Fed officials now imply three rate rises next year, rather than two, catching currency markets off guard, but Mr de Garis said this hadn't greatly affected mid and longer-term forecasts, describing the dollar's initial fall as a "knee-jerk reaction".
"The direction is the same, so I doubt whether timely we would be changing our forecast just off the back of that."
In the long term, Commonwealth Bank senior currency strategist Elias Haddad said the Fed decision would keep some downside pressure on the dollar, but noted the Aussie was still well-placed against other major currencies such as the euro and pound.
"The Australian dollar has done fairly well because of firm commodity prices and the recent uptick in commodity prices has supported the Australian dollar against most major currencies," he said.
US rate rise to help keep lid on Aussie dollar
Regarding local interest rates, Mr de Garis said the Reserve Bank of Australia would welcome the Fed's rate rise, as it kept a lid on the dollar, supporting export-oriented sectors.
"I don't think they'd be unhappy to see some further appreciation of the US dollar," he said. "I think they would be pleased with that as providing support for the economy right now."
The RBA is expected to keep interest rates on hold after the Fed's decision, but lacklustre conditions in Australia do create the potential for further cuts.
"We cannot rule out the risk of more RBA cuts because of Australia's benign inflation outlook, and also off the soft wage growth and unimpressive Australian employment conditions," Mr Haddad said.
The futures market slightly pared back the chance of a cut in interest rates from the Reserve Bank following the unexpected rise in full-time jobs. It implies a 10 per cent probability of a move by mid-2017, from 14 per cent before the jobs report.
"The leap in employment provides further evidence that the fall in GDP in the third quarter was a blip rather than anything more worrying," said Capital Economics economist Paul Dales.