THE dollar closed lower yesterday as fears of a global recession and a strengthening US dollar offset a higher than expected inflation number.
At the close of trading the dollar was buying US66.90c -- down US2.26c for the day and only marginally above the five-year low of US65c struck earlier this month.
During the course of the day, it moved between US66.35c and US69.30c.
The inflation rate of 4.7 per cent -- on the Reserve Bank's preferred measure -- failed to help the currency despite some expectations it could stop the central bank cutting rates as steeply next month.
NabCapital head of currency research John Kyriakopoulos attributed the dollar's poor performance to the negative news shrouding global economic markets.
Bank of England governor Mervyn King this week suggested a British recession was imminent.
"We have seen those fears of a global recession overwhelming what has been some improvement in credit markets," Mr Kyriakopoulos said. "The news flows continue to be pretty poor in regards to the global economy and that's the dominant theme."
With investor risk appetite already strained, an overnight drop in commodity prices on Tuesday, combined with a decline in equity markets yesterday, proved to be too much for the Aussie to bear.
"We are seeing that showing up in support for safe-haven currencies like the Japanese yen," Mr Kyriakopoulos said.
This was evident yesterday as traders moved to sell off the high-yielding dollar, which is leveraged to the global economy, while a flight to "safer" US Treasury bonds assisted the US dollar.
Commonwealth Bank chief currency strategist Richard Grace believes that as long as the greenback remains strong, the dollar will continue to grind lower.
He sees the strength of the greenback being driven by "the hoarding of US dollar cash to support liquidity requirements" and predicts this will continue into early next year.
"Until you see a narrowing in the US dollar Libor spreads, and until you see the central banks willing to reduce the amount of US dollar swap facilities they've got in place -- because at the moment they have unlimited US dollar swap facilities -- I think the demand for US dollars will continue to remain firm," Mr Grace said.
"We anticipate this will occur in (the second quarter of) 2009, about the same time as the global economy recovers, allowing a softening in the US dollar and rise in the Australian dollar into the second half of 2009."