Aussie dollar to weather China spat

The simmering diplomatic spat between Australia and China over the detention of mining company employees in Shanghai is unlikely to have significant fallout for the Australian dollar, analysts say.

While not eliminating the chance that Australia's relations with its biggest trading partner may suffer, the market experts don't see any impact so far.

The China-Rio situation, ''is not an important market mover,'' said RBC Capital Markets currency strategist Sue Trinh. ''There might be speculation that the Australia-China relationship is being strained...but we think the media speculation is overblown and any Aussie weakness on the back of that should fade.''

The Australian dollar has slumped about two US cents since the world learned that China had detained Rio Tinto employees last Sunday, including an Australian Stern Hu. The drop, though, was mostly tied to weaker commodity prices worldwide.

The Aussie dollar was buying 78.2 US cents in early afternoon trading, down from a high of 80.39 US cents on July 7, when Mr Hu's arrest became public.

Mr Hu, along with three Chinese co-workers, is accused of illegally obtaining information that hurt China's national interests.

The detention comes as Rio Tinto and other miners, including BHP Billiton, continue to negotiate new iron-ore contracts with China holding out for a larger cut than the 33 per cent reduction on last year's prices agreed by Korean and Japanese steelmakers.

The arrest also comes just weeks after Rio Tinto rebuffed an $US19.5 billion ($25 billion) investment from state-owned Chinalco.

Market dynamics

Nonetheless, whatever political and economic worries stirred up the situation, the Aussie dollar's fall is more about market dynamics than political rows, said HiFX senior consultant Tom Averill.

''To my mind I don't think there are many people in the market paying a huge amount of attention to the Rio story,'' he said. ''I don't think it's a huge market mover really.''

''Softer commodities and softer equities coming into the end of the quarter'' are the main factors, he said, especially as the bulk of the US reporting season kicks off next week.

The real pressure on the Australian dollar, Mr Averill said, is because it "had come too far too quickly over the previous quarter". Its recent fall ''is just a correction in the trend that people wanted to see.''

Mr Averill sees the dollar falling to as low as 74-75 US cents in the next two weeks. However, in the long term, the Aussie dollar is set to gain as the US dollar declines on investor worries about the state of the US economy and the US government's finances.

Long-term question

Although analysts doubt that recent events between China and Australia will impact the Aussie soon, they say a pattern of rising trade tensions could eventually weigh on its value.

If over time the market views the trade position between Australia and China being threatened, "that could have a downward impact on the Aussie'', ANZ economist Amber Rabinov said.

"We've seen the Aussie trade in recent time increasingly as a play on Asia, particularly if Chinese economic prospects are looking good ... so you could theorise that if this trade relationship was threatened, that would weigh down on the Aussie.''