Foreign Currency Exchange

News from Australia has continued to depress, after a second major domestic bank said it would book more losses from its exposure to distressed credit markets. This has furthered speculation that interest rates in Australia have peaked, news that is likely be damaging for a currency which generally benefits from Carry Trading, due to its relatively high interest rates.

A cut in interest rates in a country usually leads to the respective currency weakening on the global markets as it becomes less attractive to hold funds in the particular country. This can be seen by the effect the cut in interest rates in New Zealand had last week.

The potential gains, however, are expected by most analysts to be fairly short-lived as even with a .25 cut the base rate would remain at a relatively high level on the global market at 7%.

Long-term it remains to be seen as to whether or not the Aussie economy will suffer as much from the global credit crunch as the UK, but some degree of volatility is more than likely in the near future.