Aussie dollar in demand as Fed whets risk appetite

SYDNEY, Sep 19 (Reuters) The Australian dollar surged against the U.S. dollar and yen after an aggressive cut in U.S.

interest rates revived the appetite for riskier investments in higher-yielding currencies.

Domestic bill futures rallied as the 50 basis-point cut in U.S. rates was seen lessening the chance of a further tightening in Australia, while also helping to ease a lending logjam in the interbank market.

The Aussie dollar leaped over two U.S. cents to a six-week high of SYDNEY, Sep 19 (Reuters) The Australian dollar surged against the U.S. dollar and yen after an aggressive cut in U.S.

interest rates revived the appetite for riskier investments in higher-yielding currencies.

Domestic bill futures rallied as the 50 basis-point cut in U.S. rates was seen lessening the chance of a further tightening in Australia, while also helping to ease a lending logjam in the interbank market.

The Aussie dollar leaped over two U.S. cents to a six-week high of $0.8529 after the Federal Reserve surprised with the larger-than-expected cut in rates to 4.75 percent.

The aggressive move left investors with the clear impression the Fed would be cutting further to support the economy, pointing to a lot less interest rate support for the U.S. dollar.

"Well, they do say that the first cut is the deepest," said Matthew Johnson, senior economist at broker ICAP. "But the fact is, there has been a material downgrade of the economic outlook, and given this, the Fed will respond with more cuts." He noted Fed funds futures were already priced for an easing in October and implied rates of 4 percent by March next year.

In contrast, Australian interest rates are seen firmly on hold at 6.5 percent. Just the day before, the head of the Reserve Bank of Australia (RBA) gave an upbeat assessment of the domestic economy and said tighter monetary conditions might be welcome.

As a result, investors dived back into carry trades, borrowing yen at low rates to invest in better-yielding currencies like the Aussie and Kiwi dollars.

The local dollar soared to 98.46 yen , from 95.27 late here on Tuesday and analysts saw it heading back toward a 103.63 high from August.

The sharp drop in U.S. rates was also seen as a boost for the U.S. economy and thus for global growth and commodity prices.

The Reuters/Jefferies CRB Index <.crb> rose 0.6 percent to 326.79, near its high for the year. Spot gold leapt to $723.70/724.50 while October crude climbed 63 cents to $82.14 a barrel and base metals rallied.

Since Australia is a major commodity exporter, such price gains were a boon for the country's terms of trade and further supported the local dollar.

Debt markets gave a more mixed response to the Fed's pro-growth move with short-dated Treasuries rallying sharply but longer-term bonds restrained by concerns the rate cut could fuel inflation in the U.S.

Bonds were also playing second fiddle to the rally in equities, limiting three-year Australian bond futures to a gain of 0.030 points to 93.845. The 10-year contract was flat at 94.075.

Bills fared better as the London interbank rate eased a little, dragging three-month bank bill rates down to 6.88/90 percent, compared to a peak of 7.12 percent last week.

----------------(Snapshot at 9:25 p.m./2325 GMT)--------------- FUTURES CASH YIELD 90-DAY BILL (DEC) 93.150(+0.060) 6.94 (6.94) 3-YR BOND (DEC) 93.840(+0.030) 6.21 (6.24) 10-YR BOND (DEC) 94.075( 0.000) 5.94 (5.94) AUD/USD 0.8500 (0.8300) US 10-YR 4.47 (4.46) --------------------------------------------------------------- AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD USD +226 (+220) +147 (+148) *FUTURES -23.5 (-26.5) CAD +204 (+200) +163 (+163) *AUD 2-YR/10-YR SPREAD NZD -71 (-68) -27 ( -27) *CASH -30 ( -34) --------------------------------------------------------------- REUTERS RC BST0521 .8529 after the Federal Reserve surprised with the larger-than-expected cut in rates to 4.75 percent.

The aggressive move left investors with the clear impression the Fed would be cutting further to support the economy, pointing to a lot less interest rate support for the U.S. dollar.

"Well, they do say that the first cut is the deepest," said Matthew Johnson, senior economist at broker ICAP. "But the fact is, there has been a material downgrade of the economic outlook, and given this, the Fed will respond with more cuts." He noted Fed funds futures were already priced for an easing in October and implied rates of 4 percent by March next year.

In contrast, Australian interest rates are seen firmly on hold at 6.5 percent. Just the day before, the head of the Reserve Bank of Australia (RBA) gave an upbeat assessment of the domestic economy and said tighter monetary conditions might be welcome.

As a result, investors dived back into carry trades, borrowing yen at low rates to invest in better-yielding currencies like the Aussie and Kiwi dollars.

The local dollar soared to 98.46 yen , from 95.27 late here on Tuesday and analysts saw it heading back toward a 103.63 high from August.

The sharp drop in U.S. rates was also seen as a boost for the U.S. economy and thus for global growth and commodity prices.

The Reuters/Jefferies CRB Index <.crb> rose 0.6 percent to 326.79, near its high for the year. Spot gold leapt to 3.70/724.50 while October crude climbed 63 cents to .14 a barrel and base metals rallied.

Since Australia is a major commodity exporter, such price gains were a boon for the country's terms of trade and further supported the local dollar.

Debt markets gave a more mixed response to the Fed's pro-growth move with short-dated Treasuries rallying sharply but longer-term bonds restrained by concerns the rate cut could fuel inflation in the U.S.

Bonds were also playing second fiddle to the rally in equities, limiting three-year Australian bond futures to a gain of 0.030 points to 93.845. The 10-year contract was flat at 94.075.

Bills fared better as the London interbank rate eased a little, dragging three-month bank bill rates down to 6.88/90 percent, compared to a peak of 7.12 percent last week.

----------------(Snapshot at 9:25 p.m./2325 GMT)--------------- FUTURES CASH YIELD 90-DAY BILL (DEC) 93.150(+0.060) 6.94 (6.94) 3-YR BOND (DEC) 93.840(+0.030) 6.21 (6.24) 10-YR BOND (DEC) 94.075( 0.000) 5.94 (5.94) AUD/USD 0.8500 (0.8300) US 10-YR 4.47 (4.46) --------------------------------------------------------------- AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD USD +226 (+220) +147 (+148) *FUTURES -23.5 (-26.5) CAD +204 (+200) +163 (+163) *AUD 2-YR/10-YR SPREAD NZD -71 (-68) -27 ( -27) *CASH -30 ( -34) --------------------------------------------------------------- REUTERS RC BST0521