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Aussie slumps on EU debt crisis

The West Australian
Camera IconAussie slumps on EU debt crisisPicture: The West Australian

The Australian dollar has fallen more than two US cents on renewed fears of a looming debt crisis in Italy.

Italian 10-year government bonds have soared to yields of 7.4 per cent, spooking markets ahead of key talks on a debt package for the country on Thursday, European time.

At 4.28am, the currency was trading at 101.62 US cents, down from 103.62 cents on Wednesday.

Bank of New Zealand currency strategist Mike Burrowes said that fears around Italian bonds were the main driver pushing markets down overnight.

"Concerns are really shifting to Italy, as we see 10-year government bonds move above seven per cent, and two-year bonds also higher now," he said.

"The market is watching for Italy's vote tomorrow night on a new austerity package - that will be Berlusconi's last act before he leaves. It all really seems uncertain.

"Italy still hasn't gone to the IMF (International Monetary Fund) for a loan yet, so they're funding themselves within the market, and bond yields at seven per cent look pretty unsustainable when you've got debt to GDP at something like 120 per cent, so it looks like a snowball."

Mr Burrowes said he expected the Australian currency to slow its fall somewhat throughout Thursday, awaiting clarity on Italy's debt package and labour force data from the Australian Bureau of Statistics.

"I think the dollar will simmer down today, but tonight the market will want to see some kind of game plan in terms of government being formed in Italy," he said.

"Are they going to go for larger austerity cuts, so they don't raise as much money in the market, or will they have to go to the IMF to get a loan?

"We also have some important employment data coming out in Australia - the market's expecting a 10,000 increase in employment, so that potentially has some scope to impact on the Aussie and on rate pricing as well."

The rise in Italian 10-year bonds follows Prime Minister Silvio Berlusconi's decision on Wednesday in Europe to resign.

Berlusconi said that he would step down once a debt package had been passed in the Italian parliament on Thursday, European time.

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