Aussie dollar struggles- bonds gain on growth gloom

* RBA says economy to slow sharply despite past stimulus

* Bonds futures near record highs on safety, inflation view

SYDNEY, Nov 19 (Reuters) - The Australian dollar drifted lower on Wednesday as Asian shares failed to follow a rally on Wall Street and the country's central bank said past stimulus would not prevent a sharp sharp slowdown here.

In late trade the Aussie had shuffled back to $0.6442 AUD=, from $0.6522 late on New York on Tuesday. Support was seen around $0.6350 with the risk of more intervention from the Reserve Bank of Australia (RBA) providing a floor for now.

Sentiment was bearish, in part because the grim global outlook meant investors expected further aggressive interest rate cuts from the central bank.

That view was only reinforced by RBA Assistant Governor Malcolm Edey who on Wednesday said the economy was set to slow significantly despite the support of past rate cuts, fiscal stimulus and a falling currency [nSYA005339].

Still to come is RBA Governor Glenn Stevens, who speaks on "The Economic Situation" at 8:35 p.m. (0935 GMT).

The central bank has already slashed rates by 2 percentage points to 5.25 percent, but the bill market is pricing in another of at least 75 basis points next month and further drastic easing to 3.5 percent next year.

"The dominant risk today was that Edey would massage market expectations back towards a more modest rate cut for December," said Stephen Walters, chief economist at JPMorgan.

"Clearly, though, Edey elected not to do so. It seems that, with the December policy decision still more than two weeks away, the RBA is opting for policy flexibility."

That helped December bill futures 0#YBA: rise 0.040 points to 95.690, implying a rate of 4.31 percent.

Bond futures gained, in part thanks to a surge in Treasuries after data showed U.S. producer prices fell by a record in October and fuelled expectations of global disinflation.

Three-year bond futures YTTc1 rose 0.065 points to 96.235, while the 10-year contract added 0.09 to 95.12.

The Aussie also eased to 62.20 yen, from an early 63.34 high AUDJPY=R as the Nikkei .N225 eased despite a late bounce on Wall Street .SPX.

Stocks have become a barometer of risk appetite and when they drop, "riskier" high-yielding currencies like the Aussie tend to fall with them. ... read full article
Wed 19th November 2008 - 04:16pm