Dollar dazzler heads for US90c
The Melbourne Age, 14 July 2007
The Melbourne Age, Business
Dollar dazzler heads for 90c
Vanessa Burrows, markets reporter
14 July 2007
Page 4
DAY after day the Australian dollar continues to hit records against the US dollar and the Yen.
And currency strategists suggest it is on its way higher, predicting it will touch US90c within weeks or months, or even go dollar for dollar with the US currency.
"Probably the current environment for the Aussie is as good as it gets," said Deutsche Bank foreign exchange strategist John Horner.
It hasn't always been so. There have been times when the currency was worth less than US50c, and barely buying a third of a British pound.
Travelex CFX's foreign exchange regional director, Basil Bayn, who has worked in currency markets for decades, said that when the dollar had been pegged to a basket of currencies it sometimes traded above the US dollar. In 1983 it was buying $US1.05.
But when the dollar floated later that year the "natural reaction" was for it to be weaker than the US dollar, Mr Bayn siad.
In 1992 it reached a US47.75c low, far from last night's 18-year high of US86.94c.
Strategists agree the soaring Aussie owes a lot of its strength to "general US dollar weakness".
This weakness has lifted the Euro, introduced in January 2002, to a life-time high of $US1.3798 against the US dollar this week. The pound touched a 26-year high of US$2.0365.
Certainly the Aussie has made some gains against the major currencies, rising a 4.4 per cent against the pound and 6 per cent against the Euro in the past year, now to be worth 42.763p and EUR63c.
But those gains are nowhere near the dramatic rise against the US dollar, 15.2 per cent in the past year from near US75c.
The Aussie has also risen 22 per cent against the Yen, getting to a 16-year high of ¥106.26 yesterday, compared with about ¥87 a year ago.
HiFX director of FX advisory Chris Towner said the Australian dollar, which had long been correlated with commodity prices, had formed a strong link with the Yen, and what is commonly called the "carry trade".
"The theme of the currency market this year and last year has been yield differential," he said. "That's the driving force of the market."
As investors look for better returns, they have found borrowing a low-interest currency, such as the Yen, and buying another, such as the Australian and New Zealand dollars, is profitable.
But this does not mean commodity prices have become unimportant for predicting movements in the Australian dollar.
As the Reserve Bank's non-rural commodity index has risen from near 100 in 2004 to 152.271 in June, so has the dollar.
Likewise, as rapidly frowing countries such as China have clamoured for Australian commodities, the trade-weighted index has risn, offering another plus for the economy.
The trade-weighted index weighs each currency, comparing it with the Aussie, based on the level of trade between Australia and the country concerned. It also has reached a 22-year high.
As Mr Bayn points out: "A strong currency isn't bad - it's good. It's a reflection that the world likes your economy."
Mr Towner has a similar standpoint. "Domestically, a high Australian dollar is proof in the pudding that the Australian economy is doing very well," he said.
KEY POINTS
-
Strategists agree the Aussie owes a lot of its strength to general US dollar weakness.
-
The A$ has risne 15.2 per cent against the US dollar in the past year.