(21 June 2011 – Australia) Asian and South American central banks are buying Australian government bonds in a bid to diversify United States investments, driving up demand for the Australian dollar.Merrill Lynch Bank of America head of currencies and fixed income in Australia Chris Thomas said the yield on federal government bonds and the supply of state government debt was fuelling the central banks’ interest.
‘People . . . feel the US dollar is quite cheap and has been under pressure,’ he said. ‘Diversification continues apace and the Australian and Canadian dollars and the euro are at or near multi-year highs against the US dollar.
The higher demand for Australian debt flows through to the dollar, as the central banks buy the currency to fund the securities.
Mr Thomas said Australian state and federal governments were expected to issue another $96 billion in new debt in the coming financial year, which was providing a good source of high-quality government-backed paper for the foreign central banks.