The Australian dollar hovered close to a six-month low on Monday as the federal government's mid-year economic and fiscal outlook couldn't quite dispel fears of a ratings downgrade despite all three major ratings agencies confirming the country's triple-A rating, for now.
Standard & Poor's, which in July had warned that Australia's top rating is at risk, joined Fitch and Moody's in sticking with its AAA rating, after Treasurer Scott Morrison's vow to keep Australia on track for a surplus by 2020-21.
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Winners and losers of US dollar surge
The US dollar climbs towards a 14-year peak as global markets adjust to the idea of higher US interest rates, triggering worries over who stands to lose from a higher greenback.
But S&P; warned that the coveted rating had come under even more pressure following the update, which revealed a $10.3 billion blowout in the budget deficit over the next four years.
"Our view is that the AAA rating will be lost sooner rather than later as the fiscal outlook remains fragile," Capital Economics economist Paul Dales said.
Impact on currency to be modest
Even so, analysts do not expect a ratings downgrade to have a significant impact on the currency.
"We think that any impact would be modest and manageable," said Nomura economist Andrew Ticehurst, pointing to the recent experience of downgraded countries as well as feedback from clients across Asia.
Many Nomura clients had noted "that their mandates allow purchases of AA-rated securities and any rise in Australian dollar bond yields would allow them to purchase AUD bonds at better levels", he said.
In late trade on Monday, the Australian dollar was fetching US72.95¢, or around the level where it began the year, as the greenback continued to flex its muscles.
The currency had plunged as far as US72.66¢ in the early hours of Saturday, its lowest since early June, extending last week's slide after US Federal Reserve officials called for a faster pace of rate hikes next year.
This came on top of news that China had seized a US underwater drone in the South China Sea, rattling investors and sparking a short sell-off in riskier assets such as the Aussie dollar and US equities.
The Aussie dollar has dropped about US2.5¢ since the US central bank early on Thursday morning lifted rates for just the second time since the global financial crisis and signalled it's likely to tighten three more times next year, rather than the two times it had previously predicted.
The more hawkish tilt caught currency markets by surprise and sparked a surge in the greenback against most major currencies.
Outspoken Richmond Fed president Jeffrey Lacker, a noted hawk but not a voter this year or next, added to the US dollar rally by saying on Friday that three rate hikes next year might not be enough as inflation picks up.
"There is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year," he said. "My guess would be more than three."