End of US stimulus to hold back $A

The Australian dollar is unlikely return to record levels after the US central bank ends its second stimulus program on June 30.
GFT Forex director of currency research Kathy Lien said the end of the the US Federal Reserves’s quantitative easing (QE) program on June 30 would end the weakness of the US dollar.
‘‘The end of QE is going to be positive for the US dollar because if we take a look at how the US dollar performed the last time QE came to an end in April 2010, we actually saw a fairly significant rally in the US dollar against the euro,’’ she said.

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Ms Lien said a strong US dollar had contributed to some weakness in the Australian dollar.
Quantitative easing is aimed at stimulating the US economy through flooding the banking system with money from a bond buying program by the US Federal Reserve - that nation’s central bank.
It is the second time the Fed has used the policy and is the only stimulus tool left for the Fed as its interest rates cannot be lowered any further than their current zero to 0.25 per cent level.
On November 3 last year, the Fed announced it would start a second stimulus program, buying $US600 billion ($571 billion) of government bonds from commercial banks to free up funds and encourage lending.
The Australian dollar was already at high levels before the Fed announcement on the back of strong commodity prices. The local currency was around parity with the US dollar in early November last year and reached a post-float high of 110.11 US cent on May 31 this year.
In the past eight months the US dollar, normally a safe investment, has been shunned by the currency market with traders, preferring the yen and the Swiss franc in times of market instability.
CMC Markets foreign exchange dealer Tim Waterer said the weakness of the US dollar was due to quantitative easing.
‘‘The US dollar has been under the pump for quite some time, particularly since last November when QE2 (the second round) came into affect.
‘‘So it has been swimming against the tide whilst that QE2 phase has been underway.
‘‘Now that there is an end in sight for that, we could see the US dollar stabilise and perhaps have a better end to the year than the start of the year that it had.’’
Mr Waterer said the other big factor is the performance of the US economy, whose recovery from the global financial crisis has been patchy, was another factor affecting world currencies.
He said a more solid US recovery could be good for other currencies such as the Australian dollar because a strong US economy would be beneficial for the Australian dollar.
‘‘I think that sort of optimism would feed through to other markets,and a trader would be inclined to take on board a high-yielding currency like the Australian dollar knowing that things are looking bright,’’ he said.