May 22, 2008
THE Australian dollar is tipped to reach parity with the US dollar by Christmas for the first time since the days of a fixed exchange rate in the early 1980s.
Soaring commodity prices, decade-high interest rates and a weaker US dollar are expected to continue to boost the currency, making overseas holidays and imported goods even cheaper.
RBC Capital Markets senior currency strategist Sue Trinh said today the Australian dollar would reach parity in the December quarter.
“I wouldn't rule out a move to parity in the fourth quarter of this year,” she said.
The local unit last breached parity in July 1982, at $US1.0039, when the central bank would set the exchange rate each morning and Malcolm Fraser was prime minister.
The domestic currency reached US96.54 cents today, its highest level since it was first floated in December 1983.
The unit has gained about two US cents this week, after the Reserve Bank of Australia (RBA) on Tuesday indicated a further interest rise was on the way.
Its board also observed that the currency's rise in the past few months had been less than expected, given the strength of commodity prices.
Official interest rates were raised in February and March, taking the cash rate to a 12-year high of 7.25 per cent.
Since the last rise, the Australian dollar has been consistently above US90c, breaking through a series of levels last seen in early 1984.
With inflation running above 4 per cent, and above the central bank's 2 to 3 per cent target zone, traders cannot rule out another rate rise this year.
Rising commodity prices also are powering the Australian dollar, with record crude oil prices hitting a high of $US135 a barrel today.
Coal prices have surged by 160 per cent while iron ore has climbed by 80 per cent following newly-negotiated contracts for the key commodities which come into effect mid-year.
Both the RBA and the federal government expect Australia's terms of trade - the ratio of export to import prices - to surge by 20 per cent in calendar 2008 as China and India's appetite for commodities show no sign of abating.
“Terms of trade remain a very strong boost,” Ms Trinh said.
Expectations of higher Australian interest rates at a time of low US rates would also buoy the currency, she added.
“It (the RBA) is one of the few central banks in the world talking up its own currency.”
A weak US dollar has certainly helped the Australian currency this year, with the US Federal Reserve cutting a key interest rate by 2.25 percentage points since January.
This has widened the interest rate differential between Australia and the United States to 5.25 percentage points.
The Fed's concern about slowing US growth saw the central bank cut the federal funds rate in April to two per cent, for the first time since December 2004.
Westpac senior international economist Huw McKay said the interest rate differential is attracting foreign currency speculators to the Australian dollar.
“That is a big free kick for a foreign investor to just park their money here and laugh all the way to the bank,” Mr McKay said.
Mr McKay expects the Australian dollar to average $US1.01 in the first three months of 2009, but agrees it could reach parity sooner.
“It's actually quite a conservative forecast,” he said.
ANZ senior currency strategist Tony Morriss said the Australian was unlikely to reach parity in 2008, but the scenario could change.
“It looks more likely than it did some months ago that we would move above parity,” he said.
The Australian dollar began this calendar year around US87.57c.
Its all-time low was US47.78c, reached in April 2001.
AAP