Updated December 12, 2019 12:53:03

Photo: The Australian dollar jumped to a five-week high as the Federal Reserve left US rates on hold. (AAP: Joel Carrett)

Australian shares are headed for a moderate drop as Britain's general election unfolds and the US Federal Reserve keeps interest rates on hold.

By 12:50pm (AEDT), the ASX index had dropped 0.7 per cent to 6,708 points.

The Australian dollar jumped to 68.8 US cents, its highest value in five weeks, due to a weaker greenback following the Fed's interest rate decision.

"But at this stage, with a weak Australian domestic economy, we believe the Australian dollar will find levels above 69 US cents challenging to sustain," said Commonwealth Bank's chief currency strategist Richard Grace.

It also lifted sharply to 52.1 British pence as the latest polls revealed that UK Prime Minister Boris Johnson's previously strong lead had narrowed considerably.

To understand Brexit, it pays to understand the world that leading Brexiteers and Remainers come from — many of them were Boris Johnson's contemporaries at school.

Although Mr Johnson and the Conservatives are still the favourites to win the election, there is a possibility they may not command a parliamentary majority — which could lead to further Brexit uncertainty.

On Wall Street, the Dow Jones index closed 0.1 per cent higher at 27,911 points.

Amid a cautious trading session, the benchmark S&P 500 and tech-heavy Nasdaq lifted by 0.3 and 0.4 per cent respectively.

Spot gold jumped to $US1,478 an ounce, while Brent crude oil fell sharply to $US63.94 per barrel.

Fed holds rates steady

As expected, the Fed voted to keep its benchmark rate unchanged at the 1.5-1.75 per cent target range.

Australia's record-low cash rate, in comparison, is 0.75 per cent and is expected to fall even lower by February 2020.

The US central bank has also signalled that borrowing costs are likely to remain at that level indefinitely, having slashed rates three times since June.

"Our economic outlook remains a favourable one, despite global developments and ongoing risks," Fed chair Jerome Powell said in a news conference following the decision.

Jobs are about the only thing keeping recession at bay, but with unemployment rising, so are the risks.

"We believe monetary policy is well positioned to serve the American people by supporting continued economic growth, a strong job market and inflation near our 2 per cent goal."

New economic projections show a solid majority of 13 of 17 Fed policymakers foresee no change in interest rates until at least 2021 — while the other four expect only one rate hike next year.

Two months ago, Mr Powell said it would take a "material" change in the economic outlook for the Fed to change rates again.

"It's 'steady as she goes' from the Fed today," said Jason Pride, chief investment officer of private wealth at Glenmede Trust Co.

"The [Fed] statement provided little ground-breaking news on the path of monetary policy.

"The prevailing message out of today's meeting is that the Fed remains on hold, barring any material upside surprises for inflation."

ABC/Reuters

Topics: business-economics-and-finance, stockmarket, markets, currency, australia, united-states

First posted December 12, 2019 07:37:34