Mortgage interest rate speculation is forcing up the Aussie dollar

Speculation of the chance of an interest rate rise as early as next month has now strengthened to at least 40 per cent, as futures market momentum propels the dollar.
The dollar is expected to trade above the US80c barrier for at least a week, driven by aggressive new short positions, but a fresh bout of "risk aversion" has now emerged in some forecasts.
And the greenback was markedly weaker in most of the big swaps yesterday, as fears grew over the future of the world's largest economy.
Economists are now speculating that the Reserve Bank of Australia will raise rates to 25 basis points to 6.5 per cent when it meets in April.
Financial markets were taken aback last week by the RBA's surprise move to effectively warn that interest rate pricing was too low.
The 40 per cent likelihood is a substantial increase on last week's pricing, which had it set at less than 3 per cent.
Investment bank JP Morgan has put it at almost 50 per cent that the cash rate will be shifted to 6.5 per cent in April.
"The most likely triggers are the May budget, which almost certainly will include sweeteners, given that the Government trails the Opposition in opinion polls and is desperate to catch up, another rise in credit growth, and more evidence that wage pressure is building," chief economist Stephen Walters said.
The dollar shot as high as US80.33c in international trade yesterday morning, before the start of local equities trading.
The domestic currency then retreated, but the marginal softening allowed active traders to take on new positions.
Last night the dollar was hovering at US79.96c as most analysts predicted the currency would push back through the next benchmark.
It has touched US80c twice in the past 18 months, but its peak yesterday was the highest in more than 10 years.
The currency, according to the Reserve Bank, has spent just 5 per cent of its trading time above US80c in the past 22 years.
The number of long-term contracts being taken out on the dollar is starting to be rebuilt after a marked reduction as a result of the stock market jitters.
Westpac currency strategist Jonathan Cavenagh said the dollar momentum was being provided by short traders chasing the yields.
Hedge funds are understood to have been active buyers yesterday on the interest rate speculation while the carry trading has been reset.
The dollar, along with the New Zealand dollar, has been the target of active buying as investors borrow in the low-rate Japanese yen and buy into the high-yield currencies.
"The people who are in the short-term plays are potentially speculating that the RBA may hike rates," Mr Cavenagh said.
"There's still upside risk in the dollar from here.
The effect of the dollar movement was seen in the market yesterday, especially as building company stocks were punished.
Economists said retailers stood to benefit from the currency, as imports were made cheaper and profit margins could be inflated.
The US Federal Reserve is expected to announce that it will leave rates on hold at 5.25 per cent following its meeting overnight.
Source: The Australian

Mortgage interest rates and not stamp duty deter home buyers say Labor

First time home buyers are more concerned about the risk of another interest rate rise than whether the states should end stamp duty on house purchases the Federal Opposition said today.
Financial markets are betting on another interest rate rise this year following comments by a central bank official last Friday suggesting that the four interest rate rises since 2004 have yet to kill-off inflation pressures completely.
"If you look at the impact of those interest rate rises, they've added $88,000 to the cost of a home in Sydney of $450,000, and of course that's a home in Sydney where a first home owner wouldn't be paying any stamp duty at all," Labor treasury spokesman Wayne Swan said.
Treasurer Peter Costello is putting pressure on states to get rid of stamp duty, a tax that should have been removed with the introduction of GST in 2000.
"So what we've got out there this morning is the same old Peter Costello playing the same old blame game because he won't put up his hand and accept responsibility for the fact that inflation is driving up interest rates over time," Mr Swan said.
"The impact of four interest rate rises since the last election when he promised to keep them at record lows is causing housing stress, particularly in western Sydney."
Mr Swan said housing affordability is a complex problem.
"The first problem is the level of interest rates at the moment and certainly many home owners out there would not be welcoming another interest rate rise. That's number one," he said.
"There's a whole host of factors, at the state level, local government level, a whole host of factors that if we had some political leadership from the Federal Treasurer, who accepted some responsibility for just once in his life, then we could consider all of those things together."
Source: AAP

Falling house prices are a natural correction according to Prime Minister John Howard

Prime Minister John Howard says a fall in house prices was a natural correction to an overheated market.
House prices have fallen in Sydney with higher interest rates but risen dramatically in Perth as the West Australian economy powers along on a resources boom.
"The housing market in sections of the country did get overheated and there did need to be some correction," Mr Howard told CNBC television.
"I think that's occurred without big damage being done to borrowers and big damage being done to the industry and that's beginning to come back."
Mr Howard refused to comment on speculation the Reserve Bank will lift interest rates next month.
"As for speculation about interest rates, I won't engage in that. That's a matter for the central bank [Reserve Bank of Australia] to determine," he said.
Source: AAP