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$A tops US73¢ following Fed minutes

The Australian dollar has hit a three-week high, topping the US73¢ mark following profit-taking in the greenback, but the move may prove temporary.

A key part of the reason for the advance was a slight easing in the US dollar, which followed mixed interpretations of the latest US Federal Reserve meeting minutes. At their December meeting, policymakers debated the potential for a faster pace of interest rate increases depending on what tax and spending measures are implemented by President-elect Donald Trump and the Republican-controlled Congress.

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Fed minutes confirm inflation jitters

The US Federal Reserve's December meeting showed concerns that quicker economic growth under President-elect Donald Trump could require faster interest rate increases to ward off inflation.

At the same time, the Fed policymakers asserted the need for a gradual lifting of rates. Market watchers took the minutes as somewhat less hawkish than expected, if not dovish.

For Kathy Lien, managing director of FX strategy at BK Asset Management, the bottom line is that US dollar bulls remain in control.

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"The Fed is the only major central bank raising interest rates and nothing in the latest FOMC minutes suggest otherwise outside of the fact that they are hinging their positive outlook on a new president who may or may not be able to reshape the world in the way he promises," said Lien.

Ms Lien said this week's US December payrolls report could challenge US dollar bets, saying weaker-than-expected jobs numbers could trigger "significant profit taking" in the currency. The US dollar has been rallying amid increasingly positive data on the strength of the world's largest economy and the prospect that higher rates will be needed as the economy nears what is deemed as full employment.

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Positive but cautious

As a result of the Fed debate and higher gold prices, the Australian dollar was trading at US73.03¢ late Thursday afternoon, its highest since December 19.

Westpac senior market strategist Imre Speizer said the Aussie had potential to rise a bit further as momentum was turning positive.

However, over the next one to three months, Mr Speizer was more cautious, seeing the local currency sliding back below US72¢.

"The US dollar has had an impressive rise since the US election and has potential to rise further during the months ahead," Mr Speizer said. "The Fed's assertive tightening projections plus US fiscal expansion should maintain upside pressure on US interest rates and the US dollar.

"Against that coal and iron ore are likely to sustain a good portion of their dramatic rises, and economic data should improve in Q4 and Q1, but these forces are subservient to the US dollar's trend," Mr Speizer said. "There's also the issue of Australia's AAA rating, seen at risk."

Cloudy outlook

On balance, the outlook for the Aussie looks clouded.

NAB FX strategy co-head Ray Attrill said the year ahead could prove interesting for the Aussie given the potential widening differential in rates between Australia and the US.

"While diverging paths between the RBA and the Fed are quite common, there has only been one period in the last 25 years when the RBA has been below the Fed (1997-2001). This coincided with the AUD/USD rate trading no higher than 74 cents and as low as 48 cents.

"This begs the question whether we should expect to see a '5' rather than a '6' or a '7' in front of the AUD if the RBA does go below the Fed?, " Mr Attrill said in a currency report issued on Thursday morning.

Mr Attrill said the outlook for the currency wasn't particularly negative. "Our conclusion is that a lot has to go wrong in Australia, alongside unrelenting US dollar strength, if AUD/USD is to come close to re-running its late 1990s-2001 experience."

Citigroup agrees at least in terms of US rates rising, it sees one increase in June and a second in December: "Most all (Fed meeting) participants shifted up the upside risk to their growth forecasts."