Australian dollar tumbles on economic slowdown concerns

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The Australian dollar skidded to a two-month low on Wednesday after evidence of an economic slowdown supported market expectations for an interest rate cut later this year.

Foreign exchange markets were mostly quiet elsewhere with the U.S. dollar holding near a two-week high after Tuesday’s strong service industries and new home sales data and the euro pausing before Thursday’s European Central Bank meeting.

Australian economic growth came in at 0.2 per cent in the fourth quarter below an expected 0.3 per cent.

If the Reserve Bank of Australia, which has kept rates at a record-low of 1.50 per cent, shifts to a more dovish tilt it would be following other central banks in growing more cautious about the economic outlook.

The Aussie dollar slid 0.8 per cent to 0.7028 dollar, its lowest since Jan. 4.

Against the yen the Aussie also fell sharply, while New Zealand dollar weakened as worries about the Australian economy spread.

“The key domestic demand components were all weak and our economists suggest the door for rate cuts has opened further,” said Adam Cole, currency strategist at RBC Capital Markets.

The dollar index, which measures the greenback against a basket of currencies, was unchanged at 96.898 after hitting a two-week high of 97.008 on Tuesday.

The dollar rose overnight as unexpectedly strong data helped soothe some fears about the state of the world’s biggest economy.

The euro slipped slightly to 1.1305 dollar, hovering near two-week lows versus the greenback as investors prepare for the possibility that the ECB will on Thursday signal a delay in raising rates until next year.

The ECB is also expected to re-launch long-term bank loans soon to fight an economic slowdown.

“While we know (ECB President) Mario Draghi is the master of suppressing volatility and promoting a weaker euro, the bar is so high for a dovish surprise that even he may struggle to out-dove this market,” said Chris Weston, Melbourne-based head of research at foreign exchange brokerage Pepperstone.

Sterling was stuck near one-week lows on profit taking and renewed worries about next week’s parliamentary votes on Brexit.

The Canadian dollar traded at 1.3373 dollar. It’s lowest in nearly six weeks, hurt by a combination of trade troubles, domestic political uncertainty and bets the Bank of Canada could be close to changing its policy direction.

The yen nudged slightly higher to 111.83 yen per dollar.

Suzan O