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Australian dollar breaks $0.74 barrier, RBA goes dovish-lite

The Australian dollar scaled the 74 cent barrier on Tuesday to reach a two-year peak as the prospect of bottomless U.S. policy stimulus fuelled demand for reflationary trades, overshadowing a dovish turn by the country's central bank.

The Aussie looked set to score its seventh straight session of gains at $0.7407 AUD=D3 , having cleared major resistance around the December 2018 top of $0.7394. The next target is peaks from July 2018 at $0.7484.

The New Zealand dollar NZD=D3 reached the highest since June last year at $0.6767, breaking resistance around $0.6755. Its next target is $0.6789.

The currencies have been on a tear as the Federal Reserve breaks with decades of policy practice to focus on supporting employment rather than fighting inflation, ensuring rates will stay super low for a long time to come.

The Reserve Bank of Australia (RBA) is sticking with its 2-3% inflation target and kept interest rates steady at 0.25% after a monthly policy meeting on Tuesday. it did surprise by expanding a funding program for banks and extending the deadline out to mid-2021, which should in turn encourage them to keep lending to customers.

RBA Governor Philip Lowe also noted the Board "continues to consider how further monetary measures could support the recovery," a dovish addition that might be a nod to the Fed's shift in stance and its impact on the Aussie.

"Policymakers appear to be increasingly uneasy about the strengthening Aussie – due to last week's Fed pivot on inflation targeting – with the currency near 2-year highs," said Craig James, chief economist at CommSec.

"A stronger currency is more challenging for exporters and for the Reserve Bank to meet its own inflation target."

For now, trade flows are favouring the Aussie as data showed the country boasted its largest current account surplus on record in the June quarter at A$17.7 billion.

All else equal, that implies a net demand for the currency from trade flows and reverses years of deficits. for the June quarter due on Wednesday are still expected to show the economy suffered its worst contraction since the 1930s, but that has long been priced in.

Australian government bond futures were left little moved on the day, with the 10-year contract YTCc1 up half a tick at 99.0005

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