Australian dollar skids to five-year trough on tariff fallout

By Wayne Cole

SYDNEY, Feb 3 (Reuters) - The Australian dollar sank to a near five-year low on Monday as the threat of a global trade war hit risk sentiment and currencies of countries with a heavy reliance on exports.

The Aussie slid 1.9% to $0.6091 AUD=D3 breaking the January trough of $0.6129. That took it to depths not plumbed since 2020 in the early days of the COVID-19 pandemic when it briefly neared $0.5500.

The kiwi dollar fell almost 2% to $0.5527 NZD=D3, breaching the January low at $0.5539 and heading for the 2022 floor at $0.5510.

Even though Australia and New Zealand were not directly targeted by U.S. President Donald Trump's tariffs, they have open economies that rely on free trade, particularly with their major export market China.

The Aussie is often used by investors as a liquid proxy for China risk and to hedge against movement in the yuan CNH=D3, which was quoted at a record low in early trade.

The mood was not helped by a survey showing China's factory activity grew in January at a slower pace than in December.

A protracted trade war would be a drag on Chinese and global growth, and thus a headwind for Australia which only reinforced market expectations of coming interest rate cuts.

Futures imply around a 95% chance the Reserve Bank of Australia will cut its 4.35% cash rate by a quarter point when its policy board meets on Feb. 18. 0#AUDIRPR

Three-year bond futures YTTc1 climbed 6 ticks to 96.250 and tested a top from December.

Fallout from the trade war completely overshadowed Australian data showing retail sales dipped 0.1% in December but handily topped market forecasts of a 0.7% decline.

Sales volume rose a solid 1.0% for the whole fourth quarter and will make a useful, if modest, contribution to economic growth.

"There continues to be uncertainty about whether the strong retail trade data reflect a sustained recovery in consumer demand or merely a pull-forward in expenditure in response to promotional activity," said Abhijit Surya, an economist at Capital Economics.

"The upshot is that we don't have the tentative recovery in consumer spending to prevent the Bank from cutting rates by 25bp at its meeting in mid-February."

Likewise, investors are wagering the Reserve Bank of New Zealand will chop its 4.25% rate by 50 basis points at its meeting on Feb. 19. 0#NZDIRPR