LONDON: The Australian dollar gained over 1 percent against the U.S. dollar on Tuesday -- heading for its biggest daily rise in more than two weeks -- after the Reserve Bank of Australia surprised many investors by refraining from an interest rate cut.
The Aussie rose to $0.7711, its highest in a week, from around $0.76 before the decision, extending its recovery from a six-year trough of $0.7534 set on Thursday. It was last trading at $0.7685, up 1.2 percent on the day.
A fall in iron ore prices, Australia's single biggest export earner, and a currency that is still seen to be above fair value, had left many convinced that the RBA would reduce rates either this month or next.
The RBA policy board noted that while the Aussie had fallen against a strong greenback, the decline against a basket of currencies had been less and a lower exchange rate was needed to help the economy.
"Should the Aussie appreciate notably today or over the next few days we would have to come to the conclusion that the market has misunderstood the RBA's intention (in refraining from cutting)," said Ulrich Leuchtmann, currency strategist at Commerzbank. "In that case this would offer entry levels for shorts in the Australian dollar in the medium term."
The U.S. dollar, meanwhile, recovered almost all losses sustained after a weaker-than-expected jobs report, tailing higher Treasury yields. The index rose to 97.528 , recovering from Monday's low of 96.329, with the dent from the soft payroll data on Friday proving to be temporary.
"All of this speaks of a market that has been unconvinced about mid-year Fed rate hikes all along, yet still expects the U.S. economy to outperform its major competitors," said Kit Juckes, currency strategist at Societe Generale, adding that the Fed would raise rates sometime in the future.
New York Fed President William Dudley, a noted dove, said on Monday he viewed the jobs data "as reflecting temporary factors to a significant degree", namely the unusually harsh winter.
An industry report on the U.S. services sector also showed on Monday encouraging strength in exports and employment in March, holding out hope that the economy could quickly recover from the first-quarter slowdown.
Against the dollar, the euro fell 0.5 percent to $1.0860 . It has repeatedly failed to hold above $1.10 in the past few weeks, suggesting there is plenty of selling interest at higher levels.
The euro zone's final services sector and composite PMIs for March were both revised down slightly from their flash readings. And while the trend showed improvement in the region, the moderate downward revision weighed down on the euro.
Against the yen, the dollar stood 0.3 percent higher at 119.90, off a low of 118.71 set on Friday, after the disappointing job growth figures sent dollar bulls packing.
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