AUD Down as Flood Levy May Cause Pause for Rates Hikes

The Australian dollar took a beating today on the speculation that the interest rates may be put on hold for an extended period as the government proposed a levy to support the economy, hurt by the catastrophic floods.

Rains in Queensland state of Australia continue for almost two months, harming crops, mines, infrastructure, damaging economy and taking human lives. Australia’s Prime Minister Julia Gillard said that the flooding will cost the nation about A$5.6 billion ($5.6 billion). Gillard announced the one-off levy, which should help to raise about A$1.8 billion, while rest of the required sum will be raised by other means, like cutting climate-control measures, limiting rent assistance and delaying infrastructure projects.

The experts voiced concerns that the tax would subdue the consumer spending. As a result, the inflation would slow and the Reserve Bank of Australia would have less incentive to increase the interest rates. It’s not surprising that the Australian currency is weakening in such an unfavorable environment.

AUD/USD traded near 0.9893 as of 03:24 GMT today after yesterday’s decline from 0.9989 to 0.9917. EUR/AUD traded at 1.3857 after it climbed yesterday from 1.3720 to 1.3841. AUD/JPY rose yesterday from 82.08 to 82.23, but dropped today to about 81.80.

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