Australian Dollar Gained on Lower Risks

Australian dollar gained against other currencies – about 1% against U.S. dollar and more than 1.1% against Japanese yen, yesterday after U.S. President George W. Bush stated that government will act to prevent the further damage from the mortgage financing crisis and to help those already hurt by the crisis consequences.

AUD is currently experiencing downtrend which  started in the mid October, when the subprime lending crisis hit almost all world financial institutions. Prior to that, Australian dollar was widely used in carry trades – traders borrowed cheap yen and bought high-yielding AUD to earn on the interest rates difference. But since the global financial stability was hurt, less investors became eager to accept high risks of carry trading – AUD/JPY positions started to close and it went short.

Central banks in some countries decided to take measurs against the crisis to return the global volatility to its initial low state. And after yesterday’s speech by George W. Bush investors became more confident about the financial markets and some carry traders returned to long AUD positions. If U.S. government’s measures succeed, AUD will be winning in a long-term, if not – this rally will be just a short-term correction.