The Australian dollar pulled away from fresh 18-year peaks against the US dollar on Tuesday as concerns that troubles in the US subprime mortgage market could spillover saw investors turn risk-averse. The Aussie lost ground against the Japanese yen as carry trade positions were unwound, with Asian stocks also coming under some pressure.
"Risk is what people are focussing on and equity markets have been volatile," said John Kyriakopoulos, currency strategist at National Australia Bank. "Although the Aussie dollar hasn't been all that affected, there is a risk that carry trades could be further unwound."
The Australian dollar was quoted at $0.8472/76 against the US dollar, down from $0.8488/8490 here late on Monday. It had briefly risen past 85 US cents for the first time in 18 years in offshore trade, but then fell to the renewed bout of risk aversion.
On the crosses, the Aussie eased to 104.51/61 yen, well below a 16-year peak of 105.35 yen struck last Friday, as investors exited carry trades funded in the cheap Japanese currency.
In carry trades investors borrow in low yielding currencies like the yen to buy higher-yielding currencies like the Aussie or the New Zealand dollar. Analysts said in a more risk-averse environment, high-yielding currencies could stay under some pressure.
"Rising risk aversion should see more pressure emerge on carry trades if this (problems in the US financial sector) does become a global issue," said Tony Morriss, senior currency strategist at ANZ.
The yen jumped against the US dollar after Japanese Finance Minister Koji Omi warned of the risks attached to one-way bets against the yen. His comments echoed remarks made by officials at recent G7 meetings in reference to carry trades. "But any unwinding in carry trades is likely to be short-lived until the Bank of Japan decides to raise rates in a more aggressive manner," said Kyriakopoulos. "Unless that happens, investors will continue to invest in currencies which have higher interest rates."