Dollar tumbles after Australia raises rate

NEW YORK — The dollar tumbled Tuesday, hitting a 14-month low against the Australian currency and circling year lows against the euro, after an interest rate increase from the Australian central bank signaled other countries might increase their rates.

A report in a British newspaper — and subsequent denials from officials — that Arab states, along with China, Russia, Japan and France, were in talks to move away from using the dollar for oil trading also hurt the greenback, analysts said.

The Australian dollar rose as high as 89.11 U.S. cents in morning trading, its highest point since August 2008, from 87.94 U.S. cents late Monday in New York.

Meanwhile, the 16-nation euro rose to $1.4732 in New York morning trading, up from the $1.4661 late Monday. The Britishpound slipped to $1.5927 from $1.5947, and the dollar fell to 88.65 Japanese yen from 89.51 yen.

The Reserve Bank of Australia unexpectedly raised interest rates to 3.25 percent from a 49-year low of 3 percent Tuesday. It is the first major economy to increase the cost of borrowing.

Raising interest rates can boost a currency, as the higher yields make it more attractive to investors. The Federal Reserve has kept the U.S. federal funds rate, on the other hand, at a record low near zero.

UBS analyst Geoffrey Yu said Australia's move raises expectations for other central banks to raise interest rates.

He cautioned, however, that Australia "may prove to be an isolated case." It was the only one of the Group of 10 major economies to avoid a "technical recession," or two straight quarters of declines in gross domestic product.

South Korea, Sweden, Norway and New Zealand will likely raise rates early in the first quarter of 2010, "a prospect that would only exacerbate the outlook for the dollar," said Ashraf Laidi, chief market strategist at CMC Markets, in a research note. "A wave of rapid (dollar) selling is inevitable once the (European Central Bank) and (Bank of Japan) start to give 'real' signals (beyond mere rhetoric) for higher interest rates, especially if these are not matched by the Fed."

Fed officials have given conflicting signals lately as to when, and how quickly, they intend to raise interest rates. The ECB meets on Thursday to set rates.

Analysts also said the dollar's weakness Tuesday was partly due to an article in Britain's Independent newspaper that Arab states, along with China, Russia, Japan and France, are in talks to end using the dollar for oil trading and moving instead to a basket of currencies including the yen and Chinese yuan, the euro and gold.

These reports follow statements earlier this year from Chinese officials that pushed for an alternative system of reserve assets sponsored by the International Monetary Fund.

Denials from officials in several countries Tuesday following the report did not help buck up the dollar as equities gained in Europe, Asia and early New York trading.

The dollar, a "safe" bet, tends to trade inversely with equities.

The greenback also fell to 1.0261 Swiss francs from 1.0313 francs late Monday, and dropped to 1.0613 Canadian dollars from 1.0697.

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Associated Press Writers Doug Birch in Moscow, Diana Elias in Kuwait and Pan Pylas in London contributed to this report.