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Australian dollar drops most in almost 4 weeks

SAN FRANCISCO (MarketWatch) -- The Australia dollar dropped on Friday by the most since late July, as a government report reinforced concerns that interest rates may be lowered.

The Aussie (AUDUSD) fell to $1.0423 versus $1.0497 in late North American trading Thursday after a report from the country's Treasury indicated further concerns about the currency's strength and its effect on the economy.

After rising in the prior five weeks, the currency lost 1.5% since last Friday -- its biggest weekly drop on a percentage basis since mid-May.

"Comments from the Australian Treasury added to growing concern that Aussie overvaluation is becoming an issue that could influence domestic monetary policy decisions," said Adam Cole, head of G-10 FX strategy at RBC Capital Markets. The Aussie has held "near record levels for over a year."

While not directly calling on the Reserve Bank of Australia to lower interest rates, the comments indicate a broader concern about the currency. The central bank is expected to cut rates by a quarter-percentage point in the fourth quarter from 3.50% currently, and by a total of three quarters of a point in the next year, RBC predicts, noting that's more than the market is pricing in.

The firm expects the Aussie to end the year around $1.01 and slip to $1 by the end of 2013, according to a note dated Friday. Read more on U.S. dollar.